Why Some Countries Don’t Use 2-Letter Credit Ratings

Credit ratings are a cornerstone of global finance, influencing everything from sovereign borrowing costs to foreign investment decisions. Agencies like Moody’s, S&P, and Fitch dominate the market with their letter-based systems (e.g., AAA, BB+, C). Yet, some nations—particularly emerging economies and geopolitical outliers—reject or underutilize these ratings. Why? The reasons range from sovereignty concerns to structural biases in the rating process.

The Power and Politics of Credit Ratings

Who Controls the Narrative?

Credit rating agencies (CRAs) wield immense influence, but their assessments aren’t neutral. They’re headquartered in Western financial hubs (New York, London), and their methodologies often reflect developed-market biases. For example:
- Overemphasis on GDP growth: Ratings favor stable, high-income economies, penalizing nations with volatile but high-potential growth (e.g., Vietnam, Nigeria).
- Geopolitical slant: Agencies downgrade countries facing Western sanctions (e.g., Russia post-2014) regardless of fiscal health.

The "Junk" Label Trap

A 2-letter downgrade to "junk" (e.g., BB+ or lower) can trigger capital flight. In 2020, South Africa protested its Moody’s downgrade, arguing it ignored post-apartheid reforms. Similarly, Bolivia’s 2023 rating (B-) didn’t account for its lithium reserves’ future value.

Why Nations Opt Out

1. Sovereignty and Alternative Systems

Some countries develop localized rating frameworks:
- China’s Dagong Global: Founded in 1994, it rates China higher than S&P, citing "Western prejudice."
- Russia’s ACRA: Post-2022 sanctions, Moscow prioritized homegrown ratings over S&P’s "politicized" grades.

Critics call these tools propaganda, but proponents argue they correct for CRAs’ blind spots (e.g., state-backed stability in socialist economies).

2. The Cost of Compliance

Securing/maintaining an investment-grade rating often demands austerity: spending cuts, deregulation, and privatization. Ecuador’s 2019 IMF deal required pension reforms to avoid downgrades—sparking protests. For some governments, sovereignty trumps cheaper debt.

3. Data Gaps and Black Box Methodologies

CRAs rely on datasets skewed toward transparent markets. Ethiopia (unrated by S&P) lacks the infrastructure to report debt metrics in formats CRAs demand. Meanwhile, Angola’s 2022 BB- rating overlooked its oil-sector modernization due to "insufficient data."

Case Studies: The Ratings Rebellion

Venezuela: The Unrated Economy

After defaulting in 2017, Venezuela was deemed "selective defaulter" by Fitch. Rather than negotiate, Caracas abandoned external ratings entirely, relying on bilateral loans from China and Russia. Result? No bond market access but avoided austerity diktats.

Iran: Sanctions vs. Substance

Despite having the world’s 2nd-largest gas reserves, Iran is rated B-/B due to U.S. sanctions. Tehran now trades oil in yuan/gold, rendering Moody’s ratings irrelevant for its partners.

The Future: Decentralized Ratings?

Cryptocurrencies and AI could disrupt the oligopoly:
- Blockchain-based ratings: Projects like Bloom (BLT) aim to crowdsource credit risk data.
- Machine learning models: Hedge funds already use AI to bypass CRAs when pricing risk in unrated markets like Laos.

Yet, trust remains an issue. A 2023 IMF paper found 72% of investors still prefer "legacy" ratings—proof that inertia favors the 2-letter system.

Final Thoughts

The tension isn’t just about finance; it’s about who gets to define risk. As multipolarity grows, expect more nations to sidestep traditional ratings—whether through local alternatives or decentralized tech. The question is: Will the market follow?