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.
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Notes
- 1.
“The Credit of Foreign Governments,” Moody’s Investment Letter, 3 April 1919. The other three agencies did not mention these notions of ability and willingness to pay, which are now commonly accepted.
- 2.
Poor’s Rating Services (1922, 1925); Fitch Bond Book (1924, 1930); Standard Bond Book (1924).
- 3.
E-mail exchange with Richard Cantor (then Team Managing Director, Moody’s Investors Service), 17 November 2004.
- 4.
Between 1918 and 1929, this rating scale differed from the Moody’s corporate bond rating system, which contained fourteen and later twelve categories (Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, Daa, Da, D, E, F; the E and F categories were retired in 1923).
- 5.
Fitch Bond Book (1924).
- 6.
Standard Bond Book (1924).
- 7.
Poor’s Volume (1922, 1924); Poor’s Bank, Government and Municipal Volume (1933); Poor’s Fiscal Volume (1937). Note that the corporate scale included the ratings D**, D*, and D.
- 8.
During the two-step reduction of the rating range, bonds with highest ratings were artificially downgraded and assigned the new current highest rating (these rating actions concerned the US, British, and Canadian government bonds in 1938 and 1939).
- 9.
- 10.
Unless otherwise stated, the remaining of this book addresses the long-term credit ratings of sovereign issuers when discussing the sovereign ratings assigned by the agencies since the 1980s.
- 11.
The three terms are equivalent and are used interchangeably thereafter.
- 12.
This is Moody’s term; S&P and Fitch use the terms “developing” and “evolving,” respectively.
- 13.
- 14.
- 15.
Moody’s Analyses of Investments and Security Rating Books – Government and Municipal Securities (1921).
- 16.
Foreign governments whose USD bond rating was Aaa, Aa, or A had non-USD bonds rated one notch lower. For the sovereigns with a USD bond rating lower than A, there could be a two-notch gap.
- 17.
LC (resp., FC) ratings reflect the ability and willingness of a government to raise resources in its own currency (resp., in a foreign currency) to repay its debt.
- 18.
Nonetheless, some ratings may pierce the country ceiling if the securities benefit from special characteristics that reduce the T&C risk.
- 19.
This finding was confirmed by David Levey (former Managing Director, Sovereign Risk Unit, Moody’s Investors Service) in an interview with the author on 16 December 2003. In practice, Moody’s ratings have traditionally reflected a probability of default for investment grade; whereas the recovery rate has been taken into account only for speculative-grade issuers (e-mail from Richard Cantor to the author, 17 November 2004).
- 20.
Moody’s Investment Letter (1922), “Defaulted Foreign Government Bonds,” 28 December. Moody’s Investment Letter (1923), “Mexican Debt Agreement,” 8 February.
- 21.
This practice contradicts the rating definitions for Moody’s, described previously, where the lowest two rating categories are based on the prospects of recovery (Ca rating for defaulting bonds with high recovery prospects; C rating for defaulting bonds with low recovery prospects).
- 22.
Author’s computations based on Moody’s (2010a) and http://www.moodys.com.
- 23.
Based on http://www.standardandpoors.com and http://www.fitchratings.com. Russia and Indonesia were the only sovereigns that received a nondefault rating from Fitch even though they did not repay their debt.
- 24.
The IDR, which is equivalent to the issuer credit rating presented previously, is the benchmark “probability of default” rating. The IDR does not distinguish default events according to expected recovery rates.
- 25.
As of 31 March 2011, S&P assigned a recovery rating to 33 countries; all of them were rated 2, 3, or 4 (http://www.standardandpoors.com).
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Gaillard, N. (2012). Definition, Typology, and Refinement of Sovereign Ratings. In: A Century of Sovereign Ratings. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0523-8_3
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