Are Rating Agencies Powerful? An Investigation Into the Impact and Accuracy of Sovereign Ratings

By John Kiff, Sylwia Nowak, Liliana B Schumacher

January 1, 2012

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John Kiff, Sylwia Nowak, and Liliana B Schumacher. Are Rating Agencies Powerful? An Investigation Into the Impact and Accuracy of Sovereign Ratings, (USA: International Monetary Fund, 2012) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We find that Credit Rating Agencies (CRA)'s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor's resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs' certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

Subject: Credit, Credit default swap, Credit ratings, Credit risk, Emerging and frontier financial markets, Financial markets, Financial regulation and supervision, Money

Keywords: Credit, Credit default swap, Credit rating agencies, Credit ratings, Credit risk, Emerging and frontier financial markets, Global, Moody's rating, Rating action, Rating agency, Rating category, Rating change, Rating stability, Sovereign ratings, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/023
Stock No:

WPIEA2012023
ISBN:

9781463931858
ISSN:

1018-5941

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