Methodological issues of credit rating – Are sovereign credit rating actions reconstructible?

Credit rating agencies formulate publicly available opinions on the capacity and willingness of debtors to repay debts. By doing so, they reduce the information asymmetry between creditors and borrowers. Owing to regulatory efforts commenced in recent years, credit rating processes have become increasingly more transparent as credit rating agencies publish their methodology and make available the values calculated for the most important key variables. This study is intended to examine the extent to which the indicative rating range resulting from the methodology at the current level of transparency explains the empirically observed credit rating of sovereigns. The authors calculated a rating range of three notches and found that in the case of S&P, a higher ratio of observed credit ratings fell within this range and allowed for the reconstruction of individual steps, while Moody’s and Fitch’s currently available methodologies proved to be less suited for such a reconstruction.