scholarly journals Three Letters that Move the Markets: Credit Ratings between Market Information and Legal Regulation

2017 ◽  
Author(s):  
Ulrich G. Schroeter
Keyword(s):  
Financial Markets ◽  
Applied Research ◽  
Credit Rating ◽  
Credit Ratings ◽  
Legal Regulation ◽  
Legal Regulations ◽  
Market Information ◽  
Market Reactions ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Journal of Applied Research in Accounting and Finance, Vol. 6, No. 1 (2011), pp. 14-30As demonstrated by the market reactions to downgrades of various sovereign credit ratings in 2011, the credit rating agencies occupy an important role in today’s globalized financial markets. This article provides an overview of the central characteristics of credit ratings and discusses risks arising from both their widespread use as market information and from the increasing references to credit ratings contained in laws, legal regulations and private contracts.

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 Impact of Sovereign Credit Ratings on Capital Markets

2017 ◽  
Author(s):  
Mustafa Batuhan Tufaner ◽  
Sıtkı Sönmezer ◽  
Ahmet Alkan Çelik
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Stock Price ◽  
Credit Rating ◽  
Credit Ratings ◽  
Rating Agencies ◽  
Political Situation ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Rating Changes

Sovereign credit ratings are of great importance in terms of country's economy in recent years. Sovereign credit ratings can greatly affect both financial markets and macroeconomic balances. On the other hand, these credit ratings are closely related to the political situation of the countries. Therefore, all factors behind the credit rating announcements operating in global markets needs to be put forward. The content of this paper is to identify policy interest reaction towards sovereign credit ratings and examine of countries that experienced severe rating changes. In this bulletin, big three credit rating agencies are compared and critically assessed various credit rating of Turkey. The analyzed dataset covers sovereign rating announcements released by reputable rating agencies, stock price, Dollar / TL exchange rate, Dollar / Euro exchange rate and benchmark bond.

Uncertain Meanings of Risk

2018 ◽  
Author(s):  
Natalia Besedovsky
Keyword(s):  
Financial Markets ◽  
Credit Rating ◽  
Traditional Approach ◽  
Credit Ratings ◽  
Assessment Practices ◽  
Structured Finance ◽  
Rating Agencies ◽  
Measures Of Risk ◽  
Methodological Approaches ◽  
Ontological Uncertainty

This chapter studies calculative risk-assessment practices in credit rating agencies. It identifies two fundamentally different methodological approaches for producing ratings, which in turn shape the respective conceptions of credit risk. The traditional approach sees ‘risk’ as an only partially calculable and predictable set of hazards that should be avoided or minimized. This approach is particularly evident in the production of country credit ratings and gives rise to ordinal rankings of risk. By contrast, structured finance rating practices conceive of ‘risk’ as both fully calculable and controllable; they construct cardinal measures of risk by assuming that ontological uncertainty does not exist and that models can capture all possible events in a probabilistic manner. This assumption—that uncertainty can be turned into measurable risk—is a necessary precondition for structured finance securities and has become an influential imaginary in financial markets.

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.

scholarly journals Will Greece go Bankrupt and kill the euro?

2021 ◽  
pp. 65-90
Author(s):  
Herbert Grubel
Keyword(s):  
Financial Markets ◽  
Key Words ◽  
Risk Premium ◽  
Credit Rating ◽  
Credit Ratings ◽  
Jel Classification ◽  
Economic Data ◽  
Rating Agencies ◽  
Palabras Clave ◽  
The World

This paper compares the benefits to Greece, the Euro zone and the rest of the world arising from policies that prevent a Greek default and exit from the Euro with the costs of preventive policies. It concludes that the benefits exceed the costs, though unpredictable politics and nationalist aspirations may prevent the adoption of the rational policies. The paper also considers the causes of Greece’s problems: the failure of lenders to ask for a proper risk premium on the country’s bonds; Greece’s publication of false economic data; the failure of credit rating agencies to down-grade its bonds; the global financial euphoria and supply of liquidity that made lenders disregard traditional standards in all their dealings. The paper recommends policies to ensure the proper functioning of financial markets to prevent future crises. Key words: Greece bankruptcy, Euro survival, Greek statistics, Credit ratings. JEL Classification: F33, F34, F36, F55, G15, G24. Resumen: Este artículo compara los beneficios con los costes derivados del salvamento griego, llegando a la conclusión de que los beneficios superan claramente a los costes. También se analizan las causas del problema, el papel de las sociedades de rating y la euforia previa especulativa, efectuán-dose unas consideraciones sobre el futuro del euro y del orden financiero internacional. Palabras clave: Bancarrota Griega, Euro, Estadísticas en Grecia, Credit ratings. Clasificación JEL: F33, F34, F36, F55, G15, G24.

The geographical and income differences in the determinants of African sovereign credit ratings

2020 ◽  
Vol 11 (4) ◽  
pp. 609-624
Author(s):  
Ilse Botha ◽  
Marinda Pretorius
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Additional Information ◽  
Income Groups ◽  
Sovereign Credit Ratings ◽  
Developmental Indicators

PurposeThe importance of obtaining a sovereign credit rating from an agency is still underrated in Africa. Literature on the determinants of sovereign credit ratings in Africa is scarce. The purpose of this research is to determine what the determinants are for sovereign credit ratings in Africa and whether these determinants differ between regions and income groups.Design/methodology/approachA sample of 19 African countries' determinants of sovereign credit ratings are compared between 2007 and 2014 using a panel-ordered probit approach.FindingsThe findings indicated that the determinants of sovereign credit ratings differ between African regions and income groups. The developmental indicators were the most significant determinants across all income groups and regions. The results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa.Originality/valueThe results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa. Rating agencies follow the same rating assignment process for developed and developing countries, which means investors will have to supplement the allocated credit rating with additional information. Africa can attract more investment if African countries obtain formal, accurate sovereign credit ratings, which take the characteristics of the continent into consideration.

scholarly journals Sovereign Credit Ratings and Asian Financial Markets

2021 ◽  
Vol 24 (1) ◽  
pp. 165-181
Author(s):  
Khansa Pervaiz ◽  
Zuzana Virglerová ◽  
Muhammad Asif Khan ◽  
Usman Akbar ◽  
József Popp
Keyword(s):  
Financial Markets ◽  
Financial Market ◽  
Credit Rating ◽  
Credit Ratings ◽  
Market Development ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Financial Market Development ◽  
Sovereign Credit Rating

Each region/country seeks to become more efficient to gain the confidence of potential investors. Most of the Asian economies are categorized as emerging markets, where the role of financial markets has even become more intensified to provide financial services to increasing economic and financial activities. Asian financial market has momentously suffered during the Asian, and global financial crisis. The mass destruction was mainly caused due to the mounting uncertainty, which spillover throughout the region, where investors lost their confidence. Considering the pivotal economic role of financial markets, and implications evolve due to sovereign credit rating announcements, this study aims to model the role of sovereign credit rating announcements by Standard and Poor’s, and Moody’s on financial market development of the Asian region. For 24 Asian countries/regions, we perform a regression analysis on sovereign credit rating changes based on financial market development index and its factors. The findings of Driscoll Kraay’s robust estimator reveals that improvement in sovereign credit rating score enhances the financial market development in the region. Moreover, we applied several robustness checks, such as alternative estimators, alternative measures, and three sub-dimensions of financial market development. According to the findings from these robustness checks, the positive impact of sovereign credit ratings on financial market development in the region is robust. Unlike prior literature (which is confined to the event study approach), this study utilizes the historical grades to establish the relationship under the standard error clustering approach. Due to the diversity of investors’ speculations, we propose a micro-level extension of the present model to overcome a difference in country policy.

scholarly journals The Credit Rating Agencies — Are They Reliable? A Study of Sovereign Ratings

2012 ◽  
Vol 37 (1) ◽  
pp. 69-82 ◽  
Author(s):  
Shreekant Iyengar
Keyword(s):  
Capital Markets ◽  
Credit Rating ◽  
Credit Ratings ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Significant Difference ◽  
The Difference ◽  
The Cost ◽  
National Governments

Sovereign credit ratings estimate the future ability and willingness of the sovereign governments to service their commercial and financial obligations in full and on time. The process of evaluating the nations and assigning ratings is a business involving various international rating agencies. Governments seek the credit ratings so as to improve their access to the international capital markets. The sovereign credit ratings are an important scale for determining the cost of borrowing to a country. The ratings provide a perception to the lenders about the level of credit risk of the national governments. However, the reliability of the ratings has been a matter of debate in the past due to the methodology followed by the rating agencies. The present paper attempts to check the reliability of these ratings by considering the ratings assigned by two of the major international rating agencies — Moody's and Standard and Poor's. This is done through comparison of the ratings assigned by them and checking whether the difference is significant and responsive for the countries rated by both. A regression analysis of the ratings and some of the commonly used indicators by the two agencies to determine the ratings is also done. The results indicate an increase in the average rating difference of the two agencies over time and that the difference in the ratings assigned by the two agencies is statistically significant. Moreover, these agencies are also found to be non-responsive to each other's ratings. This raises reasonable doubts on the consistency of these ratings as the methodology followed by these agencies involves several common determinants. The regression of the ratings over the determinants indicate that the ratings of these two agencies have more or less the common determinants except the ‘external balances’ indicator exclusively determining the S&P ratings. Considering the fact that the ratings provided by these two agencies are significantly different from each other, the differences in the ratings could be explained by the differences in the weights attached to the determinants by the two agencies. However, a test of significance for the differences in weights of the given set of indicators attached by the two agencies reveals that there is no significant difference in the weights. Thus, the differences can also be attributed to the weights attached to the subjective criteria used by these agencies in order to decide the ratings. Such criteria imply the qualitative biases built by the agencies against nations on the basis of social and political conditions and their reactions to news regarding the changes in the capital markets of a nation.

Foreign banks and sovereign credit ratings: Reputational capital in sovereign debt markets

2019 ◽  
Vol 26 (1) ◽  
pp. 33-61 ◽  
Author(s):  
Jana Grittersová
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Foreign Bank ◽  
Foreign Banks ◽  
Host Countries ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Bond ◽  
Sovereign Credit Ratings ◽  
Global Banks

Sovereign credit ratings importantly influence the borrowing costs of governments in international capital markets. Yet, there is limited understanding of how credit-rating agencies determine sovereign bond ratings. I provide theoretical justification and empirical evidence to support the proposition that a substantial presence of established global banks, acting as foreign direct investors, enhances the perceived creditworthiness of the host countries that have weak domestic institutions. Foreign banks can render the host countries’ commitments to make good on their debt obligations more credible by encouraging the transparency in the financial system, disciplining their fiscal policies, and mitigating the incentives for and impact of bank bailouts. Statistical evidence from countries in emerging Europe shows that countries with high levels of foreign bank ownership tend to be assigned better sovereign credit ratings and find it easier to obtain credit at lower interest rates in sovereign bond markets. My findings are robust to various estimation techniques, to extensive controls for alternative determinants of credit ratings, for the endogeneity of foreign bank entry, and for sample-selection bias. Interviews with bankers and senior analysts at credit-rating agencies were used to complement quantitative analyses. This article is the first attempt in the literature on sovereign borrowing and debt to examine whether private market agents, such as global banks, can enhance the government’s international creditworthiness.

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