Abstract
We study the factors behind ratings mismatches in sovereign credit ratings from different agencies, for the period 1980‑‑2015. Using random effects ordered and simple probit approaches, we find that structural balances and the existence of a default in the last ten years were the least significant variables. In addition, the level of net debt, budget balances, GDP per capita and the existence of a default in the last five years were found to be the most relevant variables for rating mismatches across agencies. For speculative‑‑grade ratings, a default in the last two or five years decreases the rating difference between S&P and Fitch. For the positive rating difference between S&P and Moody’s, and for investment‑‑grade ratings, an increase in external debt leads to a smaller rating gap between the two agencies.
Highlights
Credit rating agencies play a crucial role in reducing information asymmetries in the financial markets and provide a fundamental input to the financial institutions risk assessment required by regulators
By regressing the rating differences of the three main rating agencies with both an ordered and a simple probit random‐effects model, we find some significant results, indicating the influence of some of our explanatory variables on those rating differences
Because of a lower percentage of rating differences higher than one notch, a simple probit model was used to find if it improved on the results previously obtained
Summary
Credit rating agencies play a crucial role in reducing information asymmetries in the financial markets and provide a fundamental input to the financial institutions risk assessment required by regulators. Capital requirements are calculated notably by applying to the institution financial assets a weighting factor depending on the associated credit rating. Sovereign credit ratings summarise in an ordinal qualitative scale a complex and thorough analysis of the ability a country has to service its debt. Since institutional investors nowadays are only allowed to acquire financial assets above a certain rating, countries willing to issue debt are in practice obliged to pay for a credit rating. With the globalization of financial markets and the proliferation of credit ratings, rating agencies assigning different credit ratings to the same country became more frequent. We analyse the rating differences between S&P, Moody’s and Fitch in the light of a random‐effects probit framework and using as explanatory variables a set of economic variables found in the literature as important determinants of sovereign ratings
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