Moody's credit rating: Why it matters to govts around world

New Delhi: Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities. Moody's, along with Standard & Poor's and Fitch Group, is considered one of the Big Three credit rating agencies.

The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. Moody's Investors Service rates debt securities in several bond market segments. These include government, municipal and corporate bonds; managed investments such as money market funds and fixed-income funds; financial institutions including banks and non-bank finance companies; and asset classes in structured finance. In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.

Moody's was founded by John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings. In 1975, the company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission. Following several decades of ownership by Dun & Bradstreet, Moody's Investors Service became a separate company in 2000. Moody's Corporation was established as a holding company.

Why it matters to govts around the world?

In their rating methodologies, rating agencies have developed rating criteria for assessing the performance of key macroeconomic and socioeconomic indicators. By assessing the indicators, the rating agencies are able to determine the country's borrowing ability and willingness to honour debt obligations. A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues. A poor credit rating suggests that the borrower has had trouble paying back loans in the past, and might follow the same pattern in the future. Moody’s believes a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating.