Credit ratings agencies contributing to debt crisis fears, UN expert warns
Credit ratings agencies are failing to perform their role in helping countries avert looming debt crises, which is having knock-on effect on human rights, a UN expert has warned.
Speaking at a Human Rights Council session last Tuesday, Yuefen Li, the UN Independent Expert on debt and human rights, expressed serious concerns about the imminent debt crisis that many developing countries were facing and the impact on their ability to respond to the pandemic.
She said that inherent structural problems of credit ratings agencies, already exposed by past financial and debt crisis, in particular the sub-prime mortgage crisis and the Asian financial crisis, were adding to the risk of debt defaults.
“Instead of warning of the coming of a debt crisis, and playing a role in preventing it, they end up exacerbating it,” she said. “The impact of downgrades on developing countries can be enormous”, she added.
Looming debt crisis for poor countries. Global debt has ballooned since the start of the pandemic, as countries adopted costly fiscal and monetary measures in response to the crisis, with developing countries particularly vulnerable to defaulting on their debts.
According to the ONE campaign, a movement to end poverty, 76 countries with the lowest incomes owed at least $573 billion in debt last year. Five countries defaults on the debts, including Argentina, Ecuador and Lebanon.
Some international initiatives were introduced to provide relief for poor countries in debt distress, including The Debt Service Suspension Initiative of the Group of 20. However, Li said that fears of receiving credit downgrades by ratings agencies meant that many states eligible for the initiative were choosing not to participate.
Presenting her report on the matter to the Human Rights Council, she said: “Developing countries have been using more tax revenue to service their debt, especially least developed countries and small island developing countries. This is regrettable as we are at a time when the financial and fiscal capacities of states ought to be geared toward avoiding further regression in social protection and human rights.”
“Debt crises often affect most people living in poverty, especially women, indigenous peoples and informal workers, as well as small enterprises and small-scale farmers, adding millions of people to the ranks of the unemployed,” she added in her report.
Reforms of credit ratings agencies overdue. Li called for “urgent reforms” to reign in the excessive influence of the so-called big three credit rating agencies - Standard & Poor’s, Moody’s and Fitch Ratings - which together control over 92 per cent of the global market.
“These agencies suffered defects from the start, including conflict of interests, lack of accountability or transparency in their assessments. Often, their grading is procyclical,” Li said.
“Most concerning, their assessments lack human rights considerations, hence exacerbating financial market volatility, reducing fiscal space for investments on health services, vaccines or social protection when it is sorely needed, and making Government’s efforts to contain debt crisis ineffective. This increases the suffering of the population.”
“Reforming the international debt architecture, including the role, criteria, and functioning of credit rating agencies, can no longer be postponed, especially in the face of a deep recession and an imminent debt crisis in 2021 in several developing countries,” she said.
“Issuance of credit ratings should be suspended during a crisis, such as the global Covid-19 pandemic,” she concluded.