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

John Kiff, Sylwia Nowak and Liliana Schumacher

No 2012/023, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; rating change; Moody's rating; rating category; rating action; rating agency; Sovereign ratings; credit rating agencies; credit default swap; rating stability; Credit risk; Credit ratings; Credit; Emerging and frontier financial markets; Global (search for similar items in EconPapers)
Pages: 35
Date: 2012-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25665 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2012/023

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().