Abstract
This chapter describes the rating process and emphasizes that CRAs have always used an analyst-driven approach to assign sovereign ratings.
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Notes
- 1.
Moody’s Manual (1926), “Introduction,” p. vi.
- 2.
Moody’s Investment Letter (1921), “The Foreign Situation,” 8 September.
- 3.
Standard Statistics (1922), Standard Daily Trade Service, May.
- 4.
Standard Statistics (1923), Standard Daily Trade Service, August.
- 5.
As evidenced by browsing Poor’s Volumes and Fitch Bond Books.
- 6.
After Poor’s went bankrupt and was refinanced by Paul T. Babson, the agency was headquartered in Wellesley (Massachusetts) until its merger with Standard Statistics in 1941.
- 7.
David Levey (former Managing Director, Sovereign Risk Unit, Moody’s Investors Service) in an interview with the author on 16 December 2003 in New York.
- 8.
Venezuela was rated Aaa by Moody’s when it defaulted.
- 9.
“Moody’s Moves into Sovereign Debt Rating,” Australian Financial Review , 14 July 1986.
- 10.
Information collected by the author during the S&P annual meeting in Paris, 24 June 2008.
- 11.
In August 1996, Fitch, Duff & Phelps, and IBCA rated 1, 8, and 40 countries, respectively (Huhne 1996). In August 2001, Fitch rated 71 sovereigns.
- 12.
Fitch Sovereign Brochure (undated document).
- 13.
The exception was John Moody, who certainly had a strong influence on the rating process.
- 14.
Investment Letters were renamed Investment Surveys in 1931 and Bond Surveys in 1936.
- 15.
Unlike now, Moody’s publications then included lists of “attractive” bonds as well as recommendations on whether to sell, buy, or hold securities.
- 16.
See Flandreau et al. ( 2010 ) for an exhaustive presentation of the products offered by the four agencies.
- 17.
Moody’s FC sovereign ratings increased from 11 in 1985 to 34 in 1990.
- 18.
“US Credit Rating Agency Is Considering Altering the Way It Expresses Its Assessments of Sovereign Borrowers,” Financial Times , 8 July 1988.
- 19.
David Levey (former Managing Director, Sovereign Risk Unit, Moody’s Investors Service) in an interview with the author on 22 March 2010 in New York.
- 20.
Since the International Organization of Securities Commissions (IOSCO) code was introduced in 2004, there has been a strict separation between analytical and commercial functions within every rating agency. Thus, analysts are supposed to be shielded from information about the fees being charged for their work (IOSCO 2004).
- 21.
During the past decade, the number of countries monitored by a given analyst ranged from 8 to 15 (figures based on interviews with various sovereign rating analysts).
- 22.
Since lower-ranking analysts can be lead analysts, this rule means that a lead analyst may not be allowed to vote.
- 23.
See “Fitch Withdraws Iran Rating on Bond Payment,” Reuters, 24 April 2008.
References
Fitch (various years), Fitch Bond Books.
Fitch Ratings (undated), “Fitch Sovereign Brochure”.
Fitch Ratings (2006), “The Rating Process”, July.
Flandreau M., Gaillard N. and Packer F. (2010), “To Err Is Human: Rating Agencies and the Interwar Foreign Government Debt Crisis”, BIS Working Papers No. 335, December.
Huhne C. (1996), “Rating Sovereign Risk”, Bank of England, Financial Stability Review, Issue 1, Autumn.
International Organization of Securities Commissions (2004), Code of Conduct Fundamentals for Credit Rating Agencies, December.
Moody’s Investors Service (various years), “Investment Letters”.
Moody’s Investors Service (various years), Manuals of Government Securities.
Moody’s Investors Service (2004), “Guide to Moody’s Ratings, Rating Process, and Rating Practices”, June.
Moody’s Investors Service (2009), “Non-Participating Rated Issuers, February”.
Poor’s (various years), Poor’s Volumes.
Standard & Poor’s (2009), “Guide to Credit Rating Essentials”.
Standard Statistics (various years), Standard Bond Books.
Standard Statistics (various years), “Standard Daily Trade Services”.
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Gaillard, N. (2012). How Are Sovereign Ratings Assigned?. In: A Century of Sovereign Ratings. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0523-8_4
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