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2012 | Buch

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A Century of Sovereign Ratings

verfasst von: Norbert Gaillard

Verlag: Springer New York

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

The financial difficulties experienced by Greece since 2009 serve as a reminder that countries (i.e., sovereigns) may default on their debt. Many observers considered the financial turmoil was behind us because major advanced countries had adopted stimulus packages to prevent banks from going bankrupt. However, there are rising doubts about the creditworthiness of several advanced countries that participated in the bailouts. In this uncertain context, it is particularly crucial to be knowledgeable about sovereign ratings. This book provides the necessary broad overview, which will be of interest to both economists and investors alike.

Chapter 1 presents the main issues that are addressed in this book. Chapters 2, 3, and 4 provide the key notions to understand sovereign ratings. Chapter 2 presents an overview of sovereign rating activity since the first such ratings were assigned in 1918. Chapter 3 analyzes the meaning of sovereign ratings and the significance of rating scales; it also describes the refinement of credit rating policies and tools. Chapter 4 focuses on the sovereign rating process. Chapters 5 and 6 open the black box of sovereign ratings. Chapter 5 compares sovereign rating methodologies in the interwar years with those in the modern era. After examining how rating agencies have amended their methodologies since the 1990s, Chapter 6 scrutinizes rating disagreements between credit rating agencies (CRAs). Chapters 7 and 8 measure the performances of sovereign ratings by computing default rates and accuracy ratios: Chapter 7 looks at the interwar years and Chapter 8 at the modern era. The two chapters assess which CRA assigns the most accurate ratings during the respective periods. Chapters 9 and 10 compare the perception of sovereign risk by the CRAs and market participants. Chapter 9 focuses on the relation between JP Morgan Emerging Markets Bond Index Global spreads and emerging countries’ sovereign ratings for the period 1993–2007. Chapter 10 compares the eurozone members’ sovereign ratings with Credit Default Swap-Implied Ratings (CDS-IRs) during the Greek debt crisis of November 2009–May 2010.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

The credit rating agencies (CRAs) have been under criticism since the Asian crisis. At that time, they were held responsible for aggravating the liquidity crises of several Asian countries by downgrading these issuers’ ratings by as many as ten notches within 2 months. This controversy shed light on what was then a little-known activity: the rating of sovereign credit. Since 1997, many questions have arisen about sovereign ratings. How can countries be rated like any private entity? What are the criteria used by the CRAs’ analysts to assess sovereign risk? Are sovereign ratings accurate? Do the CRAs’ views simply echo those reflected in market yield spreads?

Norbert Gaillard

Chapter 2. The Booms and Busts of the Sovereign Rating Activity

Abstract

In previous centuries, sovereigns often went bankrupt. For example, Spain defaulted three times during the Golden Century; it defaulted seven more times in the seventeenth, eighteenth, and nineteenth centuries. France defaulted eight times between 1500 and 1800. In the nineteenth century, Austria-Hungary and Prussia defaulted five times. These defaults, which involved both colonial and continental powers, show how difficult it has been to assess sovereign creditworthiness (see Reinhart and Rogoff 2009; Suter and Stamm 1992; Winkler 1933; Wynne 1951 for an exhaustive view of sovereign defaults occurred before the twentieth century).

Norbert Gaillard

Chapter 3. Definition, Typology, and Refinement of Sovereign Ratings

Abstract

In its first 1918 Manual and Investment Letters, Moody’s defined its sovereign ratings as the relative creditworthiness of government. This measure has two components: the ability and the willingness (or the “good faith”) to repay the debt. In 1919, Moody’s claimed that its measure of creditworthiness was valid generally and it established a credit scale of main sovereigns. The United States led this classification with 100% (“probability” that the country will take care of its debt in every respect), ahead of Canada (95%), the United Kingdom (90%), Belgium (85%), France (75%), Italy (70%), Germany (65%), Austria (60%), and Russia (55%). The agency indicated that its ratings conveyed the probability of country respecting its financial obligations. The manuals published by Poor’s, Fitch and Standard Statistics, gave a similar definition of their ratings.

Norbert Gaillard

Chapter 4. How Are Sovereign Ratings Assigned?

Abstract

This chapter describes the rating process and emphasizes that CRAs have always used an analyst-driven approach to assign sovereign ratings.

Norbert Gaillard

Chapter 5. Moody’s Sovereign Ratings: 1918–1939 and 1986–2006 Compared

Abstract

This chapter analyzes the determinants of sovereign ratings in two different periods. It specifically focuses on ratings issued by Moody’s during the interwar years and today (1986–2006), two periods characterized by intense sovereign rating activity. The key finding is that although the regulatory framework and the rating industry are clearly different in the two periods – as the previous chapters showed – the determinants of Moody’s sovereign ratings have remained the same.

Norbert Gaillard

Chapter 6. Sovereign Rating Methodologies: From Theory to Practice

Abstract

This chapter opens the “black box” of leading CRAs’ sovereign rating methodologies. Because only Moody’s provided details about its rating criteria during the interwar years (see Chap. 5), the scope of this analysis is restricted to the “modern era” – that is, the period 1986–2010.

Norbert Gaillard

Chapter 7. Consistency and Performance of Sovereign Ratings During the Interwar Years

Abstract

This chapter provides a comparison of sovereign ratings issued by Fitch, Moody’s, Poor’s, and Standard Statistics during the interwar years. The objective is to assess the quality of ratings assigned by these four CRAs by focusing on their ability to anticipate defaults.

Norbert Gaillard

Chapter 8. Consistency and Performance of Sovereign Ratings Since the 1980s

Abstract

This chapter compares the consistency and accuracy of sovereign ratings issued by Fitch, Moody’s, and S&P from January 1987 to January 2011. Sovereign rating policies have refined considerably – and information availability has been much enhanced – since 1918, so this chapter is more exhaustive than Chap. 7. Section 8.1 reviews the literature. Section 8.2 studies rating outlooks and reviews, which did not exist in the interwar years, and shows that the three CRAs are more prone to upgrade sovereigns with a positive outlook or a positive watch than to downgrade issuers with a negative outlook or a negative watch. Focusing on the stability of sovereign ratings, Sect. 8.3 finds that rating changes by Moody’s are the least frequent, but have the greatest magnitude. Section 8.4 compares the accuracy of Fitch, Moody’s, and S&P sovereign ratings. It turns out that S&P ratings are slightly more accurate in the short term, whereas Moody’s ratings perform better in the medium term. Section 8.5 concludes.

Norbert Gaillard

Chapter 9. Fitch, Moody’s, and S&P Sovereign Ratings and EMBI Global Spreads: Lessons from 1993–2007

Abstract

The past two decades have seen a remarkable growth in sovereign bond debt issued by emerging countries. This evolution was accompanied by the extensive use of the JP Morgan Emerging Markets Bond Index (EMBI) among investors. The EMBI, a total-return index that tracks the traded market for U.S. dollar-denominated Brady and other similar sovereign restructured bonds, was successively transformed into the EMBI⁺ and the EMBI Global (EMBIG) so as to include US dollar local markets instruments, performing loans, Eurobonds, and investment-grade issuers (JP Morgan 1995, 1999). These indices provide investors with a well-defined performance benchmark and a vehicle for analyzing sovereign risk and returns. It is therefore relevant to compare them with FC ratings assigned by Fitch, Moody’s, and S&P.

Norbert Gaillard

Chapter 10. The Limits of Sovereign Ratings in Light of the Greek Debt Crisis of 2009–2010

Abstract

This chapter explains why the CRAs failed to anticipate the Greek debt crisis of 2009–2010 and maintained views that diverged from the market’s during the crisis. Section 10.1 presents a review of the literature. Section 10.2 compares Fitch, Moody’s, and S&P sovereign ratings with credit default swap-implied ratings (CDS-IRs) prior to and during the Greek debt crisis of November 2009 to May 2010. The main finding is that the risk of default reflected in the agencies’ ratings at the end of the financial turmoil (i.e., in mid-May 2010, after the creation of the European stabilization mechanism was announced) was still lower than the risk reflected in the CDS-IRs at the beginning of the crisis (i.e., on 1 January 2010). Section 10.3 offers arguments to explain why CRAs “missed” the crisis. Two types of explanation emerge: first, the belief that an advanced country would not default; second, the use of ratings in regulatory capital standards, which served to inflate investment-grade sovereign ratings. Section 10.4 concludes.

Norbert Gaillard

Chapter 11. Conclusion

Abstract

Sovereign rating experienced two periods of high activity: the interwar years and the period since the mid-1980s. During the 1920s and 1930s, the four main credit rating agencies (Fitch, Moody’s, Poor’s, and Standard Statistics) failed to anticipate the sovereign debt crisis that broke out in 1931, and they overreacted by making massive downgrades well into 1933. Even so, the very low default rates for sovereign bonds rated in the first two rating classes indicate that the four agencies successfully discriminated among foreign government bonds. Because there were so few rated sovereigns that defaulted during the period 1986–2010, it is not possible to make reliable comparisons between the modern era’s sovereign ratings and those issued during the interwar years. Despite this reserve, an examination of default rates and accuracy ratios indicates (not surprisingly) that the ratings issued by Fitch, Moody’s, and S&P during the past 25 years have been more accurate than those from the interwar period.

Norbert Gaillard

Backmatter

Titel: A Century of Sovereign Ratings
verfasst von: Norbert Gaillard
Verlag: Springer New York
Electronic ISBN: 978-1-4614-0523-8
Print ISBN: 978-1-4614-0522-1
DOI: https://doi.org/10.1007/978-1-4614-0523-8