Sovereign Ratings: An Analysis of the Degree, Changes and Source of Moody's Judgement

71 Pages Posted: 13 Mar 2018

See all articles by Alvise Lennkh

Alvise Lennkh

European Stability Mechanism

Edmund Moshammer

European Stability Mechanism

Date Written: March 2, 2018

Abstract

This paper studies the sovereign ratings of 74 countries from 2003 to 2016, disentangling rating drivers into a ‘fundamental’ and ‘judgement’ component based on Moody’s methodology. We show that the agency applies judgement inconsistently across regions, income, rating levels and factors, time and the direction of rating changes. While downgrades are significantly linked to contemporaneous negative fundamental developments, such as weakening public finances, for upgrades we find evidence of a lagged or ‘catching-up’ effect. Out of the 29 tested explanatory variables, judgement applied by the rating committee is best explained through government bond yields, real GDP growth, the debt trend and interest payments relative to revenues.

Keywords: credit rating agencies, sovereign risk, sovereign rating

JEL Classification: F34, G15, G24, H63

Suggested Citation

Lennkh, Alvise and Moshammer, Edmund, Sovereign Ratings: An Analysis of the Degree, Changes and Source of Moody's Judgement (March 2, 2018). European Stability Mechanism Working Paper No. 27; ISBN 978-92-95085-48-0 . Available at SSRN: https://ssrn.com/abstract=3139089 or http://dx.doi.org/10.2139/ssrn.3139089

Alvise Lennkh

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Edmund Moshammer (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Register to save articles to
your library

Register

Paper statistics

Downloads
61
rank
346,085
Abstract Views
211
PlumX Metrics