A Century of Sovereign Ratings

199 Pages·2012·1.899 MB·English

by  Norbert Gaillard (auth.)

A Century of Sovereign Ratings
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Norbert Gaillard
A Century of Sovereign
Ratings
Norbert Gaillard
Economic Policy and Debt Department
The World Bank
1818 H Street, NW
Washington, DC 20433, USA
[email protected]
ISBN 978-1-4614-0522-1 e-ISBN 978-1-4614-0523-8
DOI 10.1007/978-1-4614-0523-8
Springer New York Dordrecht Heidelberg London
Library of Congress Control Number: 2011937968
© Springer Science+Business Media, LLC 2012
All rights reserved. This work may not be translated or copied in whole or in part without the written
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Printed on acid-free paper
Springer is part of Springer Science+Business Media (www.springer.com)
Acknowledgments
I would like to thank Sara Bertin, Marc Flandreau, Harold James, Frank Packer, and
Frederic Zumer for their strong support and encouragement.
I am grateful to David Levey, Richard Sylla, Richard Cantor, and several rating
analysts for their helpful comments and conversations.
Washington, DC Norbert Gaillard
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Contents
1 Introduction ............................................................................................. 1
2 The Booms and Busts of the Sovereign Rating Activity ...................... 3
2.1 Expansion of the Sovereign Rating Activity During
the Interwar Years ............................................................................ 4
2.2 The Decline of Sovereign Rating ..................................................... 6
2.3 The Recovery from the Mid-1970s .................................................. 8
References ................................................................................................. 10
3 Definition, Typology, and Refinement of Sovereign Ratings ............... 13
3.1 Definition of Ratings ........................................................................ 13
3.2 Significance of Rating Scales ........................................................... 14
3.2.1 The Meaning and the Widening of Rating Scales ................ 14
3.2.2 The Dividing Line Between Investment Grade
and Speculative Grade .......................................................... 17
3.3 Main Credit Rating Policies and Procedures ................................... 20
3.3.1 Short-Term Ratings .............................................................. 20
3.3.2 Reviews for Possible Rating Change ................................... 22
3.3.3 Rating Outlooks ................................................................... 23
3.4 Local and Foreign Currency Ratings ............................................... 23
3.5 The Country Ceiling ........................................................................ 24
3.6 Rating Sovereigns That Default ....................................................... 25
3.7 Sovereign Recovery Ratings ............................................................ 27
References ................................................................................................. 29
4 How Are Sovereign Ratings Assigned? ................................................. 31
4.1 Introduction ...................................................................................... 31
4.2 The Sovereign Rating Teams ........................................................... 31
4.2.1 The Interwar Years ............................................................... 31
4.2.2 The Modern Era ................................................................... 33
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viii Contents
4.3 The Sovereign Rating Process ......................................................... 34
4.3.1 Shifting from Unsolicited to Solicited Ratings .................... 35
4.3.2 Importance of the Rating Committee ................................... 36
References ................................................................................................. 38
5 Moody’s Sovereign Ratings: 1918–1939 and 1986–2006
Compared ................................................................................................ 39
5.1 Review of the Literature................................................................... 39
5.2 Moody’s Rating Policy .................................................................... 40
5.3 Moody’s Official Methodologies ..................................................... 44
5.4 Empirical Analysis of the Determinants of Moody’s
Sovereign Ratings ............................................................................ 50
5.5 Concluding Remarks ........................................................................ 60
References ................................................................................................. 60
6 Sovereign Rating Methodologies: From Theory to Practice ............... 63
6.1 Evolution and Comparison of Official Rating Criteria .................... 63
6.1.1 Common and Unchanged Methods for Assessing
Sovereign Risk ..................................................................... 64
6.1.2 More Crises Lead to Expanded Criteria ............................... 64
6.1.3 Modeling Sovereign Risk ..................................................... 67
6.2 Determinants of Sovereign Ratings ................................................. 72
6.2.1 Conventional Determinants .................................................. 72
6.2.2 Determinants Specific to Low- and Middle-Income
Countries .............................................................................. 72
6.3 Rating Gaps Across Agencies .......................................................... 76
6.3.1 Split Ratings Among Fitch, Moody’s, and S&P .................. 76
6.3.2 Split Ratings Between Leading Agencies
and Smaller Non-U.S. Firms ................................................ 85
References ................................................................................................. 90
7 Consistency and Performance of Sovereign Ratings During
the Interwar Years .................................................................................. 95
7.1 Review of the Literature................................................................... 95
7.2 Analysis of Rating Changes ............................................................. 96
7.3 Analysis of Average Cumulative Default Rates ............................... 101
7.4 Concluding Remarks ........................................................................ 106
References ................................................................................................. 107
8 Consistency and Performance of Sovereign Ratings
Since the 1980s......................................................................................... 109
8.1 Review of the Literature................................................................... 109
8.2 Sovereign Rating Reviews and Outlooks ......................................... 110
8.2.1 Sovereign Rating Reviews ................................................... 111
8.2.2 Sovereign Rating Outlooks .................................................. 115
8.2.3 Outlook/Watchlist Status Prior to Rating Change
Announcements .................................................................... 122
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8.3 Stability of Sovereign Ratings ......................................................... 125
8.3.1 Frequency and Magnitude of Rating Changes .................. 125
8.3.2 Rating Migration Matrices ................................................ 127
8.3.3 Rating Reversals ................................................................ 133
8.4 Accuracy of Sovereign Ratings ...................................................... 136
8.4.1 Ratings Prior to Default .................................................... 136
8.4.2 Average Cumulative Default Rates ................................... 138
8.4.3 Cumulative Accuracy Profiles and Accuracy Ratios ........ 141
8.5 Conclusions .................................................................................... 146
References ................................................................................................. 147
9 Fitch, Moody’s, and S&P Sovereign Ratings and EMBI
Global Spreads: Lessons from 1993–2007 ............................................ 149
9.1 Review of the Literature................................................................. 150
9.2 Correlations Between EMBIG Spreads and Fitch, Moody’s,
and S&P Ratings ............................................................................ 150
9.2.1 Data Description................................................................ 150
9.2.2 A Univariate Model of Spreads ........................................ 152
9.3 Adjustments of Ratings to Market Spreads .................................... 153
9.3.1 Adjustments of Ratings to Excessively High/Low
Spreads .............................................................................. 153
9.3.2 Adjustments of Ratings to Strong Increase/Decrease
in Spreads .......................................................................... 158
9.4 Reaction of Market Spreads to Rating Changes ............................. 160
9.5 Conclusions .................................................................................... 169
References ................................................................................................. 169
10 The Limits of Sovereign Ratings in Light of the Greek Debt
Crisis of 2009–2010.................................................................................. 171
10.1 Review of the Literature................................................................. 171
10.2 Perception of Sovereign Risk During the Greek
Debt Crisis: Ratings vs. CDS-IRs .................................................. 173
10.2.1 Chronicle of a Debt Crisis Foretold .................................. 173
10.2.2 Data Description and Methods.......................................... 174
10.2.3 “Sticky” Ratings vs. Volatile CDS-IRs ............................. 175
10.3 How CRAs Were Cornered ............................................................ 183
10.3.1 The Daedalean Labyrinth .................................................. 183
10.3.2 The Icarus Syndrome ........................................................ 184
10.4 Concluding Remarks ...................................................................... 185
References ................................................................................................. 186
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11 Conclusion................................................................................................ 189
Appendix 1 Sovereign Bonds in USD or in GBP Listed
on the NYSE That Defaulted in 1931–1938........................... 191
Appendix 2 Sources Used in Chap. 5 .......................................................... 193
Appendix 3 List of the 135 Bonds Included in the Sample Used
in Chap. 7.................................................................................. 195