Abstract
This paper explores why rating agencies disagree on a country’s sovereign default risk. Specifically, we analyse the sovereign ratings of four agencies and their interactions on an empirical basis. Our findings indicate that the frequency of split ratings and their lopsidedness are the result of uncertainty and the use of different rating methodologies but not of a home bias. Still, rating agencies treat world regions differently. Finally, a small and subscriber-paid agency appears to be more independent but also more volatile in its rating behaviour than the issuer-paid Big Three (Standard and Poor’s, Moody’s and Fitch).
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Notes
See Handelsblatt (January 17, 2012): “The myth of the U.S. conspiracy”.
The authors find that the Big Three exhibit only a weak home bias. Only S&P is shown to rate the USA better than other countries and Fitch exhibits a home bias for both France and the USA (based on ownership and headquarter).
Only a limited number of the Big Three ratings are unsolicited (26.6% in this sample). We find no significant difference across rating agencies between unsolicited and solicited ratings for one particular country. The results are available on request.
Some of those studies find that the relationship is bi-directional.
Investors do not necessarily rely on the rules of this standardized approach if they use the internal risk-based approach (IRB).
The authors find that the certification of a new CRA (DBRS) was followed by rating upgrades from the Big Three for those firms which received higher ratings by DBRS after certification.
A country list is provided in “Appendix”.
More details are provided in “Appendix” of this paper.
For instance, S&P’s may be more hesitant to push a country to junk status (BBB- to BB+) than to assign a downgrade within the range of investment-grade ratings.
Logit estimation results are available from the author on request.
Besides the emerging market economies, this applies also to a number of industrialized countries, namely Greece, Israel, Portugal, South Korea and the Eastern European countries.
For instance, Fitch Ratings describe political risk as “the risk that the sovereign authorities will lack the political capacity and will to mobilize resources necessary to honour their financial obligations” (Fitch 2014). The other agencies provide similar concepts ( Moody’s (2013), Standard and Poor’s (2013)).
Positive values are set equal to zero.
The home bias has not been identified for Feri and Moody’s and it is shown to hold for Fitch in France and the USA at the same time (ownership and headquarter).
We compare the ratings of each Big Three agency only with its large competitors and not with Feri in order to be able to apply the full rating scale.
Feri produces only unsolicited ratings and the Big Three also have a share of 10–20% unsolicited ratings across all country groups and regions.
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Appendix
Appendix
See Tables 13, 14, 15, 16, 17, 18, 19 and 20.
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Bartels, B. Why rating agencies disagree on sovereign ratings. Empir Econ 57, 1677–1703 (2019). https://doi.org/10.1007/s00181-018-1503-y
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DOI: https://doi.org/10.1007/s00181-018-1503-y