Sovereign and Corporate Ratings: Mechanisms, Foundations and Critical Analysis

Abstract

Ratings are evaluations made by rating agencies of a company’s or government’s ability and willingness to honor their debt obligations. Since the 1990s the rating has become an indispensable requirement for companies and countries to have access to the international financial markets. This paper clarifies several aspects related to the classification process on the basis of the documentation provided by Standard & Poor’s and Moody’s and adopts a theoretical analyticalmethodology. It also shows the relationship between sovereign and corporate ratings and the reasons that lead to the surpassing of the sovereign ceiling. The agencies issue ratings assuming that they are making available to the market relevant and possibly privileged information on the debt issuers’ ability to make the payments in due time. However, experts and researchers such as F. Partnoy have criticized the rating agencies claiming that the ratings are not informative, since they only reflect the current market risk, are not capable of forecasting crises and just worsen the already existing ones. Nevertheless, ratings are still important due to the regulatory requirements by the SEC.

Key words: rating agency, sovereign and corporate rating, sovereign ceiling