Euro Area Sovereign Ratings: An Analysis of Fundamental Criteria and Subjective Judgement

37 Pages Posted: 10 Nov 2017

See all articles by Antonello D'Agostino

Antonello D'Agostino

European Stability Mechanism; Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Alvise Lennkh

European Stability Mechanism

Date Written: May 12, 2016

Abstract

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

D'Agostino, Antonello and Lennkh, Alvise, Euro Area Sovereign Ratings: An Analysis of Fundamental Criteria and Subjective Judgement (May 12, 2016). European Stability Mechanism Working Paper No. 14. Available at SSRN: https://ssrn.com/abstract=3068806 or http://dx.doi.org/10.2139/ssrn.3068806

Antonello D'Agostino

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Alvise Lennkh (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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