## Sovereign Credit Ratings Methodology: An Evaluation

_IMF Working Papers, October 1, 2002_

## Source details

**Canonical URL:** [Sovereign Credit Ratings Methodology: An Evaluation](https://www.imf.org/en/publications/wp/issues/2016/12/30/sovereign-credit-ratings-methodology-an-evaluation-16092)

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- [Markdown version](/en/publications/wp/issues/2016/12/30/sovereign-credit-ratings-methodology-an-evaluation-16092/index.md)
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## Bibliographic details
- Authors: Ashok Vir Bhatia
- Published: October 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858433.001

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### Summary
- Paper describes and evaluates sovereign credit ratings methodologies of Standard & Poor's, Moody's Investors Service, and Fitch Ratings.
- Proposes and tests a simple definition of ratings failure based on ratings stability.
- Empirical findings point to:
  - falling failure rates,
  - consistent upside bias,
  - strong interagency correlation.
- Possible causes of ratings failure are separated into informational, analytical, revenue bias, and other incentive problems; each category is discussed.
- Highlights methodological developments after the Asian crisis, particularly regarding:
  - the estimation of contingent liabilities,
  - the assessment of international reserves adequacy.

### Key findings and observations
- Ratings failure definition: based on ratings stability (simple operational definition used and tested in the paper).
- Empirical patterns identified:
  - falling failure rates,
  - a consistent upside bias in ratings,
  - strong correlation across ratings agencies (interagency correlation).

### Possible causes of ratings failure (as categorized in the paper)
- Informational problems.
- Analytical problems.
- Revenue bias.
- Other incentive problems.

### Methodological developments emphasized
- Post-Asian crisis improvements in:
  - estimation of contingent liabilities,
  - assessment of international reserves adequacy.

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## Content in this bundle

- **Sovereign Credit Ratings Methodology: An Evaluation - WP/02/170**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/sovereign-credit-ratings-methodology-an-evaluation-16092_