scholarly journals Determination of Sovereign Credit Rating Model for European Countries

2021 ◽  
Vol 5 (3) ◽  
Author(s):  
Isik Akin
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Rating Model ◽  
Sovereign Credit Rating

Credit rating agencies play a key role in financial markets, as they help to reduce asymmetric information among market participants via credit ratings. The credit ratings determined by the credit rating agencies reflect the opinion of whether a country can fulfil the liability or its credit reliability at a particular time. Therefore, credit ratings are a very valuable tool, especially for investors. In addition, the issue that credit rating agencies are generally criticised is that they are unsuccessful in times of financial crisis. Credit rating methodologies of credit rating agencies have been subject to intense criticism, especially after the 2007/08 Global Financial Crisis. Some of the criticised issues are that credit rating agencies’ methodologies are not transparent; they are unable to make ratings on time, and they make incorrect ratings. In order to create a more reliable credit rating methodology, the credit rating industry and the ratings determined by rating agencies need to be critically examined and further investigated in this area. For this reason, in this study credit rating model has been developed for countries. Supervisory and regulatory variables, political indicators and macroeconomic factors were used as independent variables for the sovereign credit rating model. As a result of the study, the new sovereign credit rating calculates exactly the same credit rating with Fitch Rating Agency for developed countries, but there are 1 or 2 points differences for developing countries. In order to better understand the reason for these differences, credit rating agencies need to make their methodologies more transparent and disclose them to the public.

scholarly journals Sovereign credit ratings and CDS spreads in Emerging Europe

Equilibrium ◽  
2020 ◽  
Vol 15 (3) ◽  
pp. 419-438
Author(s):  
Łukasz Dopierała ◽  
Daria Ilczuk ◽  
Liwiusz Wojciechowski
Keyword(s):  
Financial Markets ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Value Added ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
The Impact

Research background: Sovereign credit ratings play an important role in determining any country’s access to the international debt market. During the global financial crisis and the European debt crisis, credit rating agencies were harshly criticized for the timing of their announcements regarding ratings downgrades and the ranges of those downgrades. Therefore, it is worth considering whether the sovereign credit rating is still a useful benchmark for investors. Purpose of the article: This article examines whether credit rating agencies still provide financial markets with new information about the solvency of governments in Emerging Europe countries. In addition, it describes the differences in the effect of particular types of rating events on financial markets and the impact of individual agencies on the market situation. Our study also focuses on evaluating these occurrences at different stages of the business cycle. Methods: This article uses data about ratings events that took place between 2008 and 2018 in 17 Emerging Europe economies. We took into consideration positive, neutral, and negative events related to ratings changes and the outlooks reported by Fitch Ratings, Moody’s, and Standard & Poor’s. We used a methodology based on event studies. In addition, we performed Wilcoxon signed-ranks test and used a logit model to determine the usefulness of cumulative adjusted credit default swap (CDS) spread changes in predicting the direction of ratings changes. Findings & Value added: Our research provides evidence that the CDS market reflects information regarding government issuers up to three months before ratings downgrades are announced. Information reported to the market by ratings agencies is only relevant in the short timeframe surrounding ratings downgrades and upgrades. However, positive credit rating changes convey more information to the market. We also found strong evidence that, in the post-crisis period, credit ratings provide markets with less information.

scholarly journals Examining the Behavior of Credit Rating Agencies Post 2008 Economic Turmoil

2017 ◽  
Vol 53 (4) ◽  
pp. 61-76
Author(s):  
Çağrı L. Uslu
Keyword(s):  
Financial Crisis ◽  
Emerging Markets ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Macroeconomic Variables ◽  
Rating Agencies ◽  
Macroeconomic Indicators ◽  
The Global Financial Crisis

AbstractThe demand for sovereign ratings has increased throughout last decades. Until the1990’s, credit rating agencies (CRAs) did not rate most of the emerging markets and the focus was almost only on developed countries, however, during this decade the number of sovereigns rated increased dramatically due to addition of emerging markets to the portfolio. The global financial crisis in 2008 led to the loss of credibility of these major credit rating companies. None of these three agencies showed any signal of macroeconomic problems in countries where the financial crisis created devastating macroeconomic results. It is believed that this failure has led credit rating agencies to behave more conservatively. This paper aims to determine whether CRAs tend to behave conservatively after the 2008 global financial crisis. If the downgrading is greater than the worsening of the economic situation in the given economies, then we can infer that CRAs tend to behave more conservatively. The good working model in estimating ratings assigned by CRAs before the crisis failed to estimate the ratings after 2008 crisis. This may have happened due to two reasons. First, as experienced in the aftermath of the former crisis, credit rating agencies may have added new macroeconomic variables in the process of assigning ratings or change the weight assigned to the already existing macroeconomic variables. Second, it is a known fact that ratings emerge from the combination of two distinct information; the quantitative part reflected by macroeconomic indicators and the qualitative judgements of the agency about the sovereign.

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

scholarly journals The Role of Credit Rating Agencies in Sovereign Debt Markets

2018 ◽  
pp. 146-166
Author(s):  
Aline Darbellay
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Past Century ◽  
The European Union ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Since the global financial crisis of 2007-2009, the leading credit rating agencies (CRAs) have faced an increasing level of legal and regulatory scrutiny in the United States (US) and in the European Union (EU). This chapter sheds light on the promise and perils of sovereign credit ratings in the light of the European sovereign debt crisis. The leading CRAs have been blamed for providing investors with inaccurate credit ratings, facing inappropriate incentives and lack of oversight. This chapter addresses the evolving function performed by CRAs over the past century. Traditionally, CRAs are private market actors assessing the creditworthiness of borrowers and debt instruments. Since the first sovereign bond ratings assigned in 1918, the rating business has grown in size and importance. Sovereign ratings supposedly predict financial distress of governments. Their role has shifted over the last four decades. Although they have repeatedly been blamed for being poor predictors of sovereign debt crises, CRAs continue to play a key role in modern capital markets.

Part VII International Securities, Including Markets and Clearing Systems, 21 Credit Rating Agencies

2021 ◽  
Author(s):  
Eborall Charlotte
Keyword(s):  
Information Asymmetry ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
The United States ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Participants ◽  
The Global Financial Crisis ◽  
Independent Assessment

This chapter concentrates on credit rating agencies (CRAs), which play a key role in financial markets. It explains how CRAs help reduce information asymmetry between investors and issuers by providing an independent assessment of the relative creditworthiness of countries or companies. It also describes how CRA's role has expanded significantly in recent decades with financial globalization, such as the introduction of references to credit ratings in regulations and the embedding by market participants of ratings in their operating procedures, investment decisions, and contracts. This chapter identifies the heavy reliance on CRAs as one of the main contributors to the global financial crisis in 2008. It also talks about the efficacy of CRAs' credit ratings after 2008, in which regulators in the United States (US) and Europe introduced new regulations intended to address the reliability of CRAs' predictions of probability of default.

scholarly journals A hard nut to crack: Regulatory failure shows how rating really works

2019 ◽  
Vol 23 (3) ◽  
pp. 266-286 ◽  
Author(s):  
Giulia Mennillo ◽  
Timothy J Sinclair
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Third Party ◽  
Credit Rating Agencies ◽  
Private Goods ◽  
Rating Agencies ◽  
Rating Agency ◽  
Before And After ◽  
The Global Financial Crisis

Credit rating agencies such as Moody’s and Standard & Poor’s are key players in the governance of global financial markets. Given the very strong criticism the rating agencies faced in the wake of the global financial crisis 2008, how can we explain the puzzle of their survival? Market and regulatory reliance on ratings continues, despite the shift from a light-touch to a mandatory system of agency regulation and supervision. Drawing on the analysis of rating agency regulation in the US and the EU before and after the financial crisis, we argue that a pervasive, persistent and, in our view, erroneous understanding of rating has supported the never-ending story of rating agency authority. We show how treating ratings as metrics, private goods, and independent and neutral third-party opinions contributes to the ineffectiveness of rating agency regulation and supports the continuing authoritative standing of the credit rating agencies in market and regulatory practices.

The Financial Crisis and Corporate Credit Ratings

2017 ◽  
Vol 92 (4) ◽  
pp. 161-189 ◽  
Author(s):  
Ed deHaan
Keyword(s):  
Financial Crisis ◽  
Default Risk ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Theoretical Models ◽  
Financial Instruments ◽  
Rating Agencies ◽  
Corporate Credit ◽  
The Global Financial Crisis

ABSTRACT Credit ratings on many financial instruments failed to accurately portray default risk before the global financial crisis. I find no decline in the performance of corporate credit ratings during or after the crisis, indicating that the failures of ratings on financial instruments were due to conditions unique to the rating agencies' financial instruments divisions. Rather, the preponderance of tests indicate that corporate credit rating performance improves after the crisis, consistent with the rating agencies positively responding to public criticism and regulatory pressures. At the same time, I find evidence of sophisticated market participants decreasing their reliance on corporate credit ratings after the crisis. Consistent with theoretical models of reputation cyclicality, a likely explanation is that the rating agencies suffer spillover reputation damage from their failed ratings on financial instruments. My study informs regulators, practitioners, and academics about the performance of corporate credit ratings during and after the crisis, and provides novel empirical evidence consistent with reputation concerns affecting credit rating usage decisions.

scholarly journals DETERMINANTS OF SOVEREIGN CREDIT RATINGS: AN APPLICATION OF THE NAÏVE BAYES CLASSIFIER

2020 ◽  
Vol 8 (4) ◽  
pp. 279-299
Author(s):  
Oliver Takawira ◽  
◽  
John W. Muteba Mwamba ◽  
Keyword(s):  
Cross Validation ◽  
Credit Rating ◽  
Naive Bayes ◽  
Credit Ratings ◽  
Naïve Bayes ◽  
Test Set ◽  
Macroeconomic Variables ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Rating

This is an analysis of South Africa’s (SA) sovereign credit rating (SCR) using Naïve Bayes, a Machine learning (ML) technique. Quarterly data from 1999 to 2018 of macroeconomic variables and categorical SCRs were analyzed and classified to predict and compare variables used in assigning SCRs. A sovereign credit rating (SCR) is a measurement of a sovereign government’s ability to meet its financial debt obligations. The differences by Credit Rating Agencies (CRA) on rating grades on similar firms and sovereigns have raised questions on which elements truly determine credit ratings. Sovereign ratings were split into two (2) categories that is less stable and more stable. Through data cross-validation for supervised learning, the study compared variables used in assessing sovereign rating by the major rating agencies namely Fitch, Moody’s and Standard and Poor’s. Cross-validation splits the dataset into train set and test set. The research applied cross-validation to reduce the effects of overfitting on the Naïve Bayes Classification model. Naïve Bayes Classification is a Machine-learning algorithm that utilizes the Bayes theorem in classification of objects by following a probabilistic approach. All variables in the data were split in the ratio of 80:20 for the train set and test set respectively. Naïve Bayes managed to classify the given variables using the two SCR categories that is more stable and less stable. Variables classified under more stable indicates that ratings are high or favorable and those for less stable show unfavorable or low ratings. The findings show that CRAs use different macroeconomic variables to assess and assign sovereign ratings. Household debt to disposable income, exchange rates and inflation were the most important variables for estimating and classifying ratings.

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