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Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings

35 Pages Posted: 2 Feb 2012  

John Kiff

International Monetary Fund

Sylwia Barbara Nowak

affiliation not provided to SSRN

Liliana B. Schumacher

International Monetary Fund (IMF) - Asia and Pacific Department; George Washington University - Department of International Business

Date Written: January 2012

Abstract

We find that Credit Rating Agencies (CRA)'s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor's resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs' certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

Keywords: Sovereign Ratings, Credit Rating Agencies, Credit Default Swap, Credit Risk, Risk Management, Sovereign Debt

JEL Classification: G20, G24, G38

Suggested Citation

Kiff, John and Nowak, Sylwia Barbara and Schumacher, Liliana B., Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings (January 2012). IMF Working Paper No. NO.12/23. Available at SSRN: https://ssrn.com/abstract=1997736

John Kiff (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sylwia Barbara Nowak

affiliation not provided to SSRN

No Address Available

Liliana Schumacher

George Washington University - Department of International Business ( email )

2023 G Street NW
Washington, DC 20052
United States
202-244-3971 (Phone)
202-244-3971 (Fax)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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