TWN Info Service on Finance and Development (Jul25/04)
31 July 2025
Third World Network

Credit Rating Agencies: Dysfunction and reform emerge as a priority in the fourth UN Financing for Development Conference

By Maria Syed and Bhumika Muchhala (July 2025)

“Determination is needed where compromise is urgent.” These words, echoing the outcome document of the fourth UN Financing for Development Conference, captured the mood in Seville—noticeably held without Washington DC’s presence.

Across nearly 100 panel and  multistakeholder roundtables and plenary sessions, one theme persisted: the debt trap constraining the Global South. From “billions to trillions,” the financing gap, estimated at US$4 trillion, underscored calls for systemic overhaul. The international debt architecture, long denounced as structurally unjust, has come under intense scrutiny since the COVID-19 pandemic amid stark statistics according to an  UNCTAD report -- 3.3 billion people live in countries that spend more on servicing debt than on healthcare, and US$2.1 billion in countries where debt costs surpasses  education spending.

Credit ratings as instruments of power

The World Bank in its latest report published just before the conference, had urged on ‘radical debt transparency’ for developing countries, in which it wanted the developing countries to disclose more comprehensive details about their borrowing compounded in complex, off-budget deals that have increased amid global financial instability. However, one of the underlying concerns for African countries like Ghana and Zambia restructuring their sovereign debt in order to achieve debt sustainability is the specter of inviting credit rating downgrades. This is despite IMF growth projections of 4% and 6.2% and Fitch Ratings downgrading Afreximbank preemptively based on the threat of sovereign defaults driven by creditor pressure. This defines the oligopolistic nature of the market that has proscribed relative power to the credit agencies which determine market confidence and borrowing costs, consequently becoming a question of equity and justice.

The oligopoly power of the ‘Big Three’ credit rating agencies (CRAs), that of Standard and Poor, Moody’s, and Fitch Ratings, collectively holding 96% of the global market share of ratings, introduces systemic risk into the international financial architecture. The dominance of the ‘Big Three’ is rooted in both their acquisition of small rating agencies and financial players, as well as from regulatory barriers to competition in major economies like the U.S., where being classified as a ‘Nationally Recognized Statistical Rating Organization’ (NRSRO) effectively constrains the creation and entry of new rating agencies.

A Third World Network (TWN) panel event in Seville featured Patrick Olonde (African Union), Richard Hunter (Fitch Ratings), Ambassador Ali Naseer Mohamed of the Permanent Mission of Maldives to the UN, Bhumika Muchhala (TWN), Jason Braganza (AFRODAD), unpacked the deep contradictions within credit rating architecture and proposed reforms that the UN General Assembly could lead. They warned how CRAs had shaped fiscal and development policy in countries stripped of monetary sovereignty and trapped in a global bond market bifurcated between 'high-risk' Global South issuers and 'safe haven' developed markets.  

Muchhala highlighted that market perception creates a market force, anchored to investment mandates of asset managers and equity funds which require ‘investment grade’ ratings to purchase sovereign bonds. Losing investment-grade status traps countries in a cycle of capital flight, higher borrowing costs, debt servicing costs, high cost of living and cuts in social expenditure.The fallout hits hardest along lines of gender, race, class, and caste—deepening existing inequalities. Therefore, the challenges of monopoly formation, procyclicality and fiscal discipline that leads to an austerity bias also exclaimed as  the “downgrade-austerity vicious-circle” creates an adverse dynamic for development justice.

The COVID-19 pandemic exposed this dynamic in real time: in early 2020 alone, 11 countries were downgraded and 12 placed on negative outlook in response to an exogenous and global health shock that individual nations played no role in creating. As the Financial Times noted, spending on pandemic response was effectively penalized. Downgrades routinely followed announcements of public investment—from school meals to healthcare expansion—undermining sovereign efforts to meet Sustainable Development Goals (SDGs). In Ethiopia, a restructuring aimed at improving debt sustainability was treated as a signal of insolvency, while in Zambia, CRAs framed restructuring as critical rather than a recovery tool. Meanwhile, Moody’s explicitly admitted to factoring climate vulnerability into its scores—meaning countries like Pakistan are downgraded not for mismanagement, but for being climate-vulnerable.

Jason Braganza and Patrick Olonde questioned the credibility of CRAs in the Global South, pointing to their absence on the ground, their disproportionate influence on policy, and their resistance to change. The UN Secretary-General has publicly criticized them for hampering debt relief, converting liquidity challenges into solvency crises. Ecuador’s case, where a democratic referendum to halt oil drilling led to a downgrade, exemplifies the deeper problem: private agencies increasingly dictate national policy, including environmental sovereignty. The challenge, then, is not just technical reform but democratic legitimacy. CRAs operate with a gap between their published methodologies and opaque scoring decisions.

Africa for instance, learning through painful experience, is now pushing for stronger domestic capital markets to buffer against volatility. On this note, Richard Hunter, Chief Risk and Credit Officer at Fitch Ratings,  candidly admitted, "While Fitch ratings insists its system is not default sensitive”, suspending ratings would provoke investor backlash and raise borrowing costs, because there is “no alternative.” This reveals that what is marketed as financial neutrality is, in practice, a form of structural power. It is grounded in the self-fulfilling prophecy where the negative credit rating intends to reflect risk, influencing investor behavior and market conditions that increases the likelihood of a default thereby validating the negative assessment.

The credit rating agencies like Fitch Ratings have a discretion to serve the bond market.  While Hunter validates most of the critiques, he also mentioned the record of fewer than 100 investment-grade defaults which is touted as proof of credibility and pension funds seeking only a 3% return impose timelines that clash with the long-term social and ecological imperatives of the Global South. Hence, CRAs face not only a technical challenge, but a moral one. With momentum growing behind the UN tax convention and calls to embed debt and climate risks into credit assessments, the case for CRA reform has never been clearer.

Fitch Ratings has also issued proposals on how it plans to ‘refine’ its treatment of sovereign debt. Framed as technical clarifications, the proposals include providing specific guidance on how it will rate long-term secured sovereign bonds or those partially backed by third parties—raising questions about how such "guarantees" might distort assessments of real risk. The agency also aims to formalise its approach to assigning and removing the “Restricted Default”  label, claiming this will better reflect evolving credit conditions.

Notably, Fitch seeks to clarify what constitutes a “Distressed Debt Exchange” , offering guidance for market participants rather than for the countries struggling under the weight of unjust financial conditions. As the reform of credit rating agencies becomes an urgent political demand from developing countries, Fitch’s proposals underscore the asymmetry at the core of the international financial architecture—where the arbiters of creditworthiness remain largely shielded from democratic oversight, yet wield enormous power over public budgets and development paths.

Politics of credit downgrades revealed by structural bias

In another event at the Seville Conference, organised by the International Development Economics Associates and the South Centre, the discussion on reforming the international debt architecture highlighted the conflict of interest—emphasising that the interests of global capital are being prioritised, with CRAs particularly serving the needs of global financial markets. Professor Jayati Ghosh stressed that the methodology of CRAS is structural, not just technical,  and the need to push for long-term and scenario based credit assessments is necessary. This ascribes weight to the important discussion of the policy space of the Global South states in the context of the international currency hierarchy.

The Jubilee Debt Report, which critiques the systemic dysfunction of current credit rating practices, has also highlighted the flawed logic of sovereign credit assessments, the self-fulfilling nature of downgrades, and the misalignment between credit ratings and the long-term, concessional financing required for the SDGSs and climate action. The report reiterates long-standing critiques of public debt-to-GDP ratios as inadequate indicators—pointing to how CRAs have frequently erred in both medium-term assessments and in evaluating the impacts of pre- and post-pandemic fiscal measures.

One of the most revealing  points made was that Low-Income Countries (LICs), despite being among the most fiscally disciplined, refrained from implementing countercyclical measures during the pandemic—not because of macroeconomic constraints, but out of fear of credit downgrades and resulting capital flight of US$300 billion, the lowest level since 2004 by April 2020. The data reflect this disparity: spreads on LICs surged by 7 to 11 percentage points, whereas spreads on advanced economies increased by only 1 basis point, revealing the extent to which LICs were disproportionately punished by global markets. An example stated of investments in 15 debt-distressed countries—7 of which if  defaulted—would generate returns five times higher than US Treasury bills, revealing the stark contradiction between perceived and actual risk. This disparity reflects deeper structural issues like global currency hierarchies and power imbalances, where advanced economies benefit from stronger currencies and lower risk premiums.

Additionally, many countries are compelled to direct investments, such as pension funds, into Triple-A-rated assets, further entrenching investment hierarchies while limiting financial sovereignty for less developed nations. The debate prompted audience members to share examples from other countries, including the case of the Bahamas between 2016 and 2022, during which multiple credit downgrades—triggered by external shocks—exacerbated debt distress through procyclical effects, constraining available policy options for debt sustainability.

An equitable financial architecture requires rethinking CRAs

The outcome document of the Seville Conference makes a vital decision in paragraph 55 to “establish a recurring special high-level meeting on credit ratings under the auspices of ECOSOC for dialogue among Member States, credit rating agencies, regulators, standard setters, long-term investors, and public institutions that publish independent debt sustainability analysis.”

It is vital that the convenings center the voices and perspectives of borrower nations and communities affected by contractions of national fiscal space as a result of debt burdens.  As stated in the outcome document, the meeting will discuss the use of credit assessments, exchange good practices for CRA regulation, and share perspectives on rating methodologies.

Meanwhile, the Civil Society Mechanism on FfD called for an “intergovernmental commission under ECOSOC to regulate, monitor and hold accountable CRAs, given the central role they play in the international financial architecture.” One key rationale for a commission is that it is anchored in the normative power of agenda-setting within intergovernmental processes led by UN Member States and can issue actionable mandates. While the softer form of a multistakeholder dialogue proffered by the outcome document possesses some potential to address the key CRA dysfunctions of methodological bias establishing disproportionately higher borrowing costs for the poorest countries, inaccuracy and pro-cyclicality in ratings, as well as tackle market concentration, dominant position, and conflicts of interest, –the political will to tackle core issues cannot be assumed. Consistent international pressure, as well as trust, cooperation, and mutual reciprocity, will need to be pursued by all involved actors, centering an intergovernmental process among UN Member States.

Some recommendations for the dialogue include, for example, to reform rating methodology in alignment with the SDGs, social and environmental, as well as human rights and gender equality commitments; examine needed international institutional innovations required to

correct and avert the adverse impacts of CRAs in the financial architecture;  and, importantly, ‘’explore proposals such as the establishment of an international public credit rating agency within the UN to provide more transparent, accurate, and equitable assessments of creditworthiness.”

The rationale for mandating the exploration of an international public credit

agency at the UN, includes its potential to effectively reform and regulate rating methodologies in order to fully recognize the public interest mandate of the State, therefore providing

investors with ratings that reflect greater accuracy and objectivity, and effectively

support fair access to and terms of international borrowing, particularly for the goal

of achieving sustainable development.

The regulation of information should rely on factors from risk evaluations and the standards used by institutions to classify multilateral development banks, countries, and firms into risk categories. These regulations could fall under the International Organisation of Securities Commissions (IOSCO) , with the IMF assessing whether the standards are met. Evaluations should also consider whether risk perceptions and credit ratings are fairly applied, rather than overstating the risks faced by low-income countries, especially in sub-Saharan Africa.

Publicly owned and multilateral credit rating agencies that promote global public goods also avoid being both market evaluators and market players simultaneously. Additionally, historical data can be progressively developed in order to explore the adequacy and accuracy of different rating systems over time as well as their responsiveness to changing circumstances, including crises.

The momentum building on CRA reform makes an explicit point: CRAs are no longer merely technical financial actors, they are agents who determine the conditions for economic and social justice across the global South. It is time to go well beyond palliative tinkering and toward structural reform that ensures fair terms for borrowers that enable the right to development as well as fiscal sovereignty in the Global South.