| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP311021 |
| Author Name | : D Satish |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 21 |
Credit Rating Agencies (CRAs) play a crucial role in reducing the asymmetry in the information available to the issuer and investor. This role gains even more significance when rating is for sovereign entities and their securities. The CRAs like S&P, Moody's, and Fitch, which rate sovereign entities, consider a number of variables, both qualitative and quantitative, to assess the creditworthiness and rating of these entities and their securities. The case study gives a view of the sovereign credit rating industry, its major players, the industry issues and controversies. It also discusses the variables and parameters used by these big three agencies to rate sovereign entities. Most importantly, the case study helps the students to develop a basic model taking generally accepted variables to arrive at a credit score for two of the largest economies in the world - the US and the UK. This will help the student appreciate the various variables that go into sovereign credit rating apart from helping them to develop a basic model and analyze the creditworthiness of the two sovereign entities. The case also comes with Excel supplements.
There are two superpowers in the world today in my opinion. There's
the United States and there's Moody's Bond Rating Service. The United States
can destroy you by dropping bombs, and Moody's can destroy you by downgrading
your bonds. And believe me, it's not clear sometimes who is more powerful.
- Thomas L Friedman1
Sovereign Credit Ratings play a significant role in attracting foreign investments. Credit Rating Agencies (CRAs) specialize in assessing the creditworthiness of sovereign issuers. Moody's Investors Service (Moody's), Standard and Poor's (S&P), and Fitch Ratings (Fitch) are the dominant CRAs. A rating upgrade is a positive change in a sovereign's rating triggered by steady improvements in the political and economic environment whereas a downgrade for a country means a negative change, indicating a worsening economic and business environment. Investors see a downgrade as a risky bet and demand higher returns to lend to these governments.