The real-world impact of financial architecture: Credit ratings, the Covid-19 pandemic and Africa

by Dr Daniel Cash

Credit rating agencies like Moody's and S&P Global have the role of answering one key question that an investor will have: how likely am I to get my investment back, and on time? The answer to that question will usually set the level of interest the borrower must pay to offset the risk for the investor. That, in a nutshell, is why the multi-billion dollar enterprises of Moody's, S&P and Fitch Ratings (amongst some other smaller players) exist. When a company issues a "bond" containing a binding agreement to borrow money from prospective investors at a pre-agreed rate and for a pre-agreed time, the ratings that the credit rating agencies (CRAs) give to those bonds are, historically, very accurate. However, in the early 2000s, complicated and exotic financial products were created, known as "structured finance", that pooled a number of financial revenues (ie from residential mortgages) to which investors could invest in a portion of those pooled revenues, for a price; CRAs provided ratings for those financial products too but, as we know from the extraordinary Financial Crisis of 2007/2008, those ratings were nowhere as near to accurate as the corporate bond ratings the CRAs have traditionally provided. Yet, countries need to finance their operations just like a company does and to do that they offer "sovereign bonds" which investors can invest in. For those too, credit ratings are required.