A recent development in the credit rating space could signal important progress in one of the more intractable challenges in global development finance. The challenge is how countries can manage periods of acute debt stress without being pushed prematurely towards default.
The current system can discourage countries facing acute financial stress from seeking temporary liquidity relief, because doing so may trigger market reactions that worsen borrowing conditions. Delays in seeking support can, in turn, deepen financial instability.
But Fitch Ratings, one of the world’s three major credit rating agencies, has revised its sovereign rating criteria. This is the analytical framework for assessing country creditworthiness.
At first glance, the change concerns a narrow technical issue: when countries can temporarily pause bond repayments without being treated as being in “default”.
But the implications may be more significant. This is particularly true for emerging markets and developing economies that are highly exposed to external shocks, constrained fiscal space and heavy debt burdens.
