Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC

This paper disentangles and quantifies the sources of sovereign rating adjustments issued by the main rating agencies (Fitch, Standard and Poor's and Moody's) because of the global financial and European sovereign debt crises. We use a methodology (Rating Adjustment Decomposition) that allows us to decompose and quantify the portion of the rating adjustments motivated by changes in economic, financial and institutional quality factors (Δeconomic situation) and by changes in CRAs’ rating policies (Δrating policy). A third component (misprediction) is considered as the measure relies on a set of prediction exercises. Using 3,581 sovereign ratings from 104 (developed and developing) countries, we document that a significant portion of the rating adjustments (downgrades and upgrades) is due to changes in rating policies. The impact of these policy changes and the resultant rating adjustments are heterogeneous across countries and asymmetric between downgrades and upgrades. Furthermore, with the exception of the GIPSI countries, changes on rating policies tend to be larger for developing than developed economies.