Credible Sovereign Ratings: Beyond Statistics and Regulations

Abstract:

This article sheds new light on the credibility of sovereign ratings, and raises some doubts about their accuracy and impartiality. Although credit rating agencies (CRAs) are tasked with issuing accurate sovereign ratings, the stability of ratings suffers when CRAs inflate them owing to anticipated yet uncertain lender-of-last-resort intervention. The impartiality of sovereign ratings can be compromised also by regulators’ expectations and by the demands of investors and debt issuers.

These problems were not addressed by Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies. This article explains how to improve sovereign rating methodologies by revamping the standard through-the-cycle approach. Ratings criteria should place greater emphasis on the sustainability of both total debt and the exchange rate; they should account also for spillover effects and the central government’s cost of bank bailouts.

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