The Transparency of Credit Ratings – Reconstruction of Hungary’s Sovereign Rating

After the crisis that commenced in 2008, the observed procyclicality and the slow responses of the credit rating institutions to credit risk events cast strong doubts on the justification of the major role of the credit rating agencies in the financial markets and the reliability of their ratings. Therefore, this case study examines the extent to which the reconstruction of the foreign currency denominated debt ratings of Hungary, as a sovereign issuer, can be implemented accurately under the present transparency of the credit rating processes, i.e. to what degree the indicative rating range, obtained on the basis of the credit rating agencies’ methodology, explains the actual credit rating. Using the publicly available methodological documentation of Moody’s, Standard and Poor’s and Fitch Ratings, we performed the model calculation of Hungary’s credit rating at the three institutions. Although the level of transparency of the three rating agencies has improved, ratings for Hungary could only be reconstructed with some uncertainty. Major progress could only be achieved if the rating agencies calculated the input indicators of the model from known data sources with known calculation at all times.