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

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.