When all is said and done, the primary objective of a credit rating BIS central bankers’ speeches  3  is to estimate the probability that a borrower will service its debt in full and on time. This probability depends on two factors – the ability to pay and the willingness to pay – which, as history has shown us, are not necessarily one and the same, as could maybe be seen in the examples of Finland and Argentina. Sometimes it seems as though rating agencies exceed their mandate and act as though they are purveyors of some sort of Good Housekeeping seal of approval for economies and governments. For example, one could ask what the Republic of Iceland’s probability of default is, since the country didn’t default during the financial crisis. 1 While it is pointless to debate this fact with them, it actually, seems to me that a number of improvements have taken place in the wake of the crisis. Upon closer examination, much of what rating agencies take into account is clearly related to developments in both ability and willingness to service debt. Among the factors they consider are debt levels and guarantees, GDP growth potential, the size and structure of the economy, and other factors that affect vulnerability to shocks, institutional quality, governance and policy continuity, and political risk. This gives some indication, of course, of which factors are a drag on Iceland’s credit rating at present, and how they could be addressed.
But if we can preserve stability and GDP growth next year while demonstrating that we can at least begin lifting the capital controls without compromising stability and confidence, our chances for a higher credit rating should improve markedly. Thank you. 1  4  For further information, see: the Governor’s comments at a panel discussion held at a BIS symposium entitled A world without risk-free assets? Bank for International Settlements, Basel, 8–9 January 2013. See: here. BIS central bankers’ speeches