RATING AGENCIES are private-sector firms which “rate” borrowing companies and countries. The ratings given largely determine the interest rate payable by the borrower.

If a rating agency marks down a country, the country will have to pay higher servicing costs. In many cases this can be prohibitive and the country concerned may have no option but to raise taxes and cut expenditure. Higher unemployment usually results.

Over the years, and just before the financial meltdown in 2007, it was found that many rating agencies got it badly wrong. There have also been cases of blatant conflict of interest, where a rating agency was already being paid by a company. Companies received ratings which were far too optimistic. This in turn “fooled” these companies’ lenders and shareholders.

Conflicts of interest apart, rating agencies do not have a good forecasting record and doubts have been expressed about what service they provide exactly. Clearly the existing system is broken and needs to be fixed.

The International Monetary Fund should be given a lead role in rating countries, if not companies. The IMF does a thorough analysis of almost every economy in the world at regular intervals (whether the country is borrowing from the IMF or not).

It would be a relatively easy and cost-effective matter for the IMF to derive country ratings from these analyses. The IMF hires well-qualified staff from around the world and, where necessary, could draw on other bodies such as the OECD and BIS, etc.

Such a change would be seen as a partial cleaning-up operation after the excesses of private banks and other financial companies throughout the

last decade. Over time the ratings provided by the IMF would carry far more weight with capital markets than those provided by private-sector companies.