Are Sovereign Credit Ratings Objective and Transparent?

Sovereign credit ratings provided by international rating agencies to different countries have a definite impact on their access to the international credit market. These ratings help to develop lenders’ perception about the level of credit risk of the national governments. However, the reliability of the ratings has been a matter of debate due to the methodology followed by the agencies. The present paper attempts to check the reliability of these ratings, by considering the ratings assigned by two of the major international rating agencies—Moody’s and Standard and Poor’s. This is done through comparison of the ratings assigned by them and checking whether the difference is significant and responsive for the countries rated by both. A regression analysis of the ratings and some of the commonly used indicators by the two agencies to determine the ratings, is also done. The results indicate an increase in the average rating difference of the two agencies over time and that the difference is statistically significant. Moreover, the rating methodology followed by these agencies involves several common indicators, except the external balances indicator. The differences in the ratings, however, are also caused due to subjective assessments of the countries by the rating agencies.