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2012 | OriginalPaper | Chapter

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

Author : Norbert Gaillard

Published in: A Century of Sovereign Ratings

Publisher: Springer New York

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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.

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previous chapter Consistency and Performance of Sovereign Ratings Since the 1980s

next chapter The Limits of Sovereign Ratings in Light of the Greek Debt Crisis of 2009–2010

In this chapter, Fitch sovereign ratings include the credit ratings assigned by IBCA and Duff & Phelps prior to their merger with Fitch in 1997 and 2000, respectively.

Moody’s upgraded Pakistan in February 2002 and Argentina in June 2005 at a time when the spreads of the two countries were excessively high.

August 1998 was the month with the highest spreads for the period under study.

The two percentages are weighted averages based on Fitch, Moody’s, and S&P downgrades for July 1997–December 1998 and Fitch, Moody’s, and S&P upgrades for June 2005–April 2007 (author’s calculations).

Here I continue using monthly stripped spreads.

I consider that ratings are expected to be upgraded (respectively downgraded) when there is a strong decrease (respectively increase) in spreads.

I assume that all rating changes (day 0) occurred before the end of the trading day.

Daily spreads are here used for the period 31 December 1993 to 28 February 2007.

Uruguay was downgraded from investment grade to speculative grade on 14 February, 13 March, and 3 May 2002 by S&P, Fitch, and Moody’s, respectively (see Chap. 8).

This choice is implied by the fact that the number of rating changes differs across agencies (Table 9.11), and one could raise doubts about the influence of an agency whose upgrades and downgrades have an impact on spreads, but are very few.

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Title: Fitch, Moody’s, and S&P Sovereign Ratings and EMBI Global Spreads: Lessons from 1993–2007
Author: Norbert Gaillard
Publisher: Springer New York
Book: A Century of Sovereign Ratings
Print ISBN: 978-1-4614-0522-1

Electronic ISBN: 978-1-4614-0523-8

Copyright Year: 2012
DOI: https://doi.org/10.1007/978-1-4614-0523-8_9