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Unprecedented government support measures introduced in response to Covid-19 have alleviated much of the pressure on credit ratings, but the delicate task of withdrawing that support represents a key risk in the months ahead, according to the International Organization of Securities Commissions (IOSCO).

The umbrella group of global securities regulators published a report that examines the impact of pandemic-driven government support measures on the credit ratings provided by the big three rating agencies (Moody’s Investors Service, Fitch Ratings and Standard & Poor’s).

“In response to the Covid-19 pandemic, governments worldwide rapidly deployed fiscal, monetary, and financial support measures on an exceptional scale. Simultaneously, the pandemic-induced economic and market turmoil led to many credit ratings downgrades, bringing [credit ratings agencies] and their ratings under greater regulatory, industry and media focus,” IOSCO said in a release.

The regulators found that government supports played a “significant role” in easing the immediate downgrade pressure — but the long-term impact of those supports remains uncertain.

“The expansive monetary and fiscal support could lessen defaults over the near term, but [government supports] result in an increase of existing corporate debt levels at a time of reduced revenues, which may produce less favourable effects in the long-term,” the report said.

While government policy actions have enabled record corporate debt issuance, the premature withdrawal of that stimulus “could lead to a credit crunch,” the report warned.

Indeed, the report said that the rating agencies view the “premature, uncoordinated, or otherwise flawed” pullback of governments as a critical downside risk to the post-pandemic recovery.

“Overall, the winding down of support and stimulus schemes has the potential to present a significant challenge in the months ahead,” the report said.

While the premature reduction in government supports is one risk, the report noted that the rating agencies also see a prolonged period of fiscal loosening as potentially having a negative impact on sovereign ratings, “due to persistent budget and debt deterioration expectations.”

IOSCO concluded that the effects of government supports on credit ratings will continue to be important considerations for regulators in the aftermath of the economic shock from the Covid-19 health crisis.

“Ultimately, the shape of the recovery will be key to future credit rating actions,” IOSCO said. “Although [the rating agencies] have indicated in public reports that they do not expect to adopt further wide-ranging reassessments of credit ratings, there remains considerable uncertainty around the future economic recovery.”