Euro Area Sovereign Ratings: An Analysis of Fundamental Criteria and Subjective Judgement
37 Pages Posted: 10 Nov 2017
Date Written: May 12, 2016
This paper studies the sovereign ratings of the current 19 euro area Member States from 2005 to 2015. It disentangles the rating drivers into a ‘fundamental’ and ‘subjective’ component using Moody’s methodology, and explores which variables explain the ‘subjective’ component, that is Moody’s judgement. The main results show that judgement is applied to varying degrees, both across countries and over time. We find that past judgement as well as the 10-year government yield spread to the Bund are accurate predictors of the ‘subjective’ rating component. Our results suggest that Credit Rating Agencies should increase their methodological transparency and publish two ratings for each sovereign issuer, namely, i) a quantifiable, ‘fundamental’ rating which policymakers and market participants can replicate, and ii) a final rating, which includes agencies’ judgement.
Keywords: Credit Rating Agencies, Sovereign Risk, Sovereign Ratings, Euro Area Crisis
JEL Classification: F34, G15, G24, H63
Suggested Citation: Suggested Citation