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Are Sovereign Credit Ratings Objective? A Tale of Two Agencies

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  • Liping Zheng

Abstract

The sovereign credit ratings provided by credit rating agencies have great impact on a country's access to credit markets. To gain access to international credit markets, a country usually seeks ratings from the three biggest international credit rating agencies: Standard & Poor's, Moody's, and Fitch. However, the reliability of credit ratings by these international credit agencies has been under debate and has attracted more attention since the global financial crisis. Studies have demonstrated the differences among the ratings by these biggest rating agencies, but little research has been undertaken on the ratings by other agencies. A Chinese credit rating agency, Dagong, attracted a lot of attention after it first published U.S. ratings below AAA in August 2011, three days before Standard & Poor's downgraded U.S. debt from AAA to AA+. The present paper fills the gap in the literature by examining the differences between the sovereign credit ratings by Standard & Poor's and Dagong. The paper also checks the reliability of these ratings by a regression analysis of the ratings and commonly used sovereign risk indicators. The results indicate that the two rating agencies shared several common indicators in their rating methodologies, but subjective judgments also played a role in the ratings assigned by these two agencies.

Suggested Citation

  • Liping Zheng, 2012. "Are Sovereign Credit Ratings Objective? A Tale of Two Agencies," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(5), pages 1-3.
  • Handle: RePEc:spt:apfiba:v:2:y:2012:i:5:f:2_5_3
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    Citations

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    Cited by:

    1. Slapnik, Ursula & Lončarski, Igor, 2023. "Understanding sovereign credit ratings: Text-based evidence from the credit rating reports," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    2. Luitel, Prabesh & Vanpée, Rosanne & De Moor, Lieven, 2016. "Pernicious effects: How the credit rating agencies disadvantage emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 286-298.
    3. Sami Ben Mim & Ridha Nouira & Fatma Mabrouk, 2023. "Non-Linear Determinants of Developing Countries’ Sovereign Ratings: Evidence from a Panel Threshold Regression (PTR) Model," Sustainability, MDPI, vol. 15(4), pages 1-23, February.
    4. Bush, Chunping, 2022. "The Chinese credit rating industry: Internationalisation, challenges and reforms," Journal of Economics and Business, Elsevier, vol. 118(C).
    5. Ben Hmiden, Oussama & Tatoutchoup, Didier & Nguimkeu, Pierre & Avelé, Donatien, 2024. "Discrepancy and cross-regional bias in sovereign credit ratings: Analyzing the role of public debt," Economic Modelling, Elsevier, vol. 131(C).
    6. Slapnik, Ursula & Lončarski, Igor, 2021. "On the information content of sovereign credit rating reports: Improving the predictability of rating transitions☆," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    7. De Moor, Lieven & Luitel, Prabesh & Sercu, Piet & Vanpée, Rosanne, 2018. "Subjectivity in sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 366-392.
    8. Bundala, Ntogwa, 2012. "Do Economic Growth, Human Development and Political Stability favour sovereign Creditworthiness of a Country? A Cross Country Survey on Developed and Developing Countries," MPRA Paper 47626, University Library of Munich, Germany.
    9. Yaser A. AlKulaib & Musaed S. AlAli, 2021. "Examining the Factors Affecting Sovereign Credit Rating of Gulf Cooperation Council Countries," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(1), pages 12-22, January.

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