Credit Ratings Research at Bangor Business School

On 5th December 2011, the credit rating agency Standard & Poor’s (S&P) attracted news headlines by placing the credit ratings of 15 eurozone nations under review (‘watch’) for downgrade. It is the first rating agency to signal a strong threat (50% chance) of a sovereign credit downgrade for AAA-rated nations including Germany, France, Netherlands and Austria. In taking this action, S&P reinforces its reputation as a ‘first mover’ among rating agencies for signalling negative sovereign rating news. Using a 15-year dataset, researchers at Bangor Business School identified that S&P has tended to act earlier than other agencies in placing sovereign government ratings under review for downgrade (International Review of Financial Analysis, 2011).

Professor Owain ap Gwilym and Dr Rasha Alsakka have also recently analysed the criticisms levelled at rating agencies for their perceived role in the European sovereign debt crisis (see Intereconomics – Review of European Economic Policy).

In August 2011, S&P was the first mover in downgrading the USA’s sovereign rating from the AAA status. This also fits within the historical pattern for sovereign downgrade actions, as demonstrated in other research by Bangor Business School (‘Leads and lags in sovereign ratings’, Journal of Banking and Finance, 2010, volume 34, no.11).

It is very important to emphasise that many credit rating users (e.g. regulators and bond investors) prefer stability in credit ratings over short-term ‘accuracy’. The above research projects also identify that Moody’s (the main competitor to S&P) follows a policy which tends to place greater emphasis on stability in its ratings of sovereign governments.

Publication date: 8 December 2011