Abstract
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.