Pernicious effects: How the credit rating agencies disadvantage emerging markets

Luitel, Prabesh; Vanpée, Rosanne; Moor, Lieven De

doi:10.1016/j.ribaf.2016.04.009

Cited by 20 publications

(16 citation statements)

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“…After the start of the European debt crisis in 2009, the importance of the financial balance, economic development and external debt increased substantially, and the effect of Eurozone membership switched from positive to negative (Reusens and Croux 2016); also, GDP growth gained much importance for highly indebted sovereigns and government debt became much more important for countries with a low GDP growth rate; it had been explored by using RE ordered probit modelling (Gultekin-Karakas et al 2016). In one paper authors explore the reliability of credit ratings and conclude that separate analyses of developed and developing countries suggest that the consistency of credit ratings differs by favouring the developed country group (Luitel et al 2016). It is found that credit rating agencies favour their home countries and the homes of their major shareholders, to the detriment of foreign countries (Kajurova 2014).…”

Section: Literature Reviewmentioning

confidence: 99%

Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism

Šergo

Gržinić

2018

South East European Journal of Economics and Business

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Sustainable tourism plays a dominant role in the economic well-being of some of the world’s countries, especially small ones. Tourism earnings account for a significant proportion of their GDP, and they have an overwhelming reliance on tourism as a source of service exports. The general trends in tourism earnings and volatilities in country risk ratings often go hand in hand, especially for small touristic countries in that region. The research presented in this paper provides a comparative assessment of the international country risk ratings and highlights the importance of their tourism earnings and tourism export. This study employs the ordered response and Poisson count panel data model for a sample of twenty-two countries most reliant on tourism, including Mediterranean countries. The aim of this study is to investigate whether the tourism determinants of sovereign credit ratings for those countries vary between different rating agencies (Standard & Poor’s, Moody’s and Fitch’s). The key finding is that an increase in tourism earnings as a proportion of GDP and as the main export share in the total country export impairs the sovereign risk rating and turns out to be robust across the different methodologies.

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Section: Literature Reviewmentioning

confidence: 99%

Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism

Šergo

Gržinić

2018

South East European Journal of Economics and Business

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“…Binici and Hutchison (2018) analyzed the problem if the credit rating agencies provide valuable information in market evaluation of sovereign default risk. Luitel, Vanpée, and De Moor (2016) analyzed how the credit rating agencies disadvantage emerging markets. Driss, Massoud, and Roberts (2016) tried to answer the question if credit rating agencies are still relevant?…”

Section: Introductionmentioning

confidence: 99%

Is Credit Rating Reserved Territory for Credit Rating Agencies? A Multimoora Approach for European Firms and Countries

Brauers

Lepkova

2019

Technological and Economic Development of Economy

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Credit Rating Agencies rate firms and countries by internal experts but with a final qualitative judgment by their management acting as decision makers. These ratings on their turn influence the countries credit rating and ipso facto of their enterprises. The work of the CRA is in fact double: credit rating of firms and other organizations at one side and countries on the other. Considering the credit rating of firms, the CRA made significant mistakes during the Recession 2007−2009 and their judgment is too much American oriented, in any way from a European point of view. Consequently, in Europe many efforts were made to come to a new agency, but all efforts failed. It could be different for the rating of countries. Is a more scientific approach, eventually on a quantitative and structural basis, not possible? Therefore, MULTIMOORA, a quantitative method, is suggested. The study was made for all countries of the European Continent. Based on data available in 2013 and on their extrapolation, the results are quite comparable to the results of Standard & Poor’s Credit Rating System of the moment. As the classifications of Moody’s and Fitch are very similar to those of Standard & Poor’s the outcome would be similar for these other Credit Rating Agencies.

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“…Moreover, these factor weights can vary internationally and domestically. Furthermore, they are not fully transparent in their disclosure of the methodology used for assigning a credit rating to a sovereign (Luitel et al, 2016). Hence, this leads to highly judgmental decisions in the committees and the view that the decisions of the agencies could include some bias.…”

Section: Introductionmentioning

confidence: 99%

“…On the other hand, some studies concentrates on whether the gradings of CRAs involve bias or not. Based on previous literature, three different type of sovereign rating bias is summarized as in Luitel et al, (2016): (1) the rating agencies assign a higher rating to their home country which corresponds to a home country bias (Fuchs and Gerry, 2017), (2) the rating agencies assign a higher rating to countries that are close to them which corresponds to a proximity bias (Doluca, 2014), and (3) the rating agencies underrate emerging / developing countries when compared to advanced economies (Tennat and Tracey, 2016;Kucuksarac and Duran, 2016). Particularly, as in the case of third type of bias when the emerging or developing countries are underrated, their costs of borrowing rise significantly and they encounter more difficulties in the international financial markets in terms of the availability of funds.…”

Section: Introductionmentioning

confidence: 99%

Are Emerging Market Economies Subject to Credit Rating Bias : Evidence from South Africa, Hungary and Turkey Cases

Canbaloğlu

Sezgin

Küçükkocaoğlu

2019

isarder

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This study aims to reveal whether there exists bias in the assignments of S&P and Moody's specifically against South Africa, Hungary and Turkey by also exploring the determinants of credit ratings of these three countries for the time span of 2002:Q4-2016:Q4. Design/ methodology/approach-The independent t-test and one-way ANOVA test are utilized when the means of S&P and Moody's grades of three countries are compared. Besides, in order to inspect how the macroeconomic determinants of the credit ratings of each country affect their credit ratings and detect the subjectivity component of the country rating models, OLS regresion models are constructed. Finally, pooled regression model including country dummy variables is established to detect whether countries are initially rated with a bias by the Credit Rating Agencies (CRAs) regardless of economic variables. Empirical Results: First, the mean comparison tests show that Turkey has the least credit ratings among the three by both S&P and Moody's, and the difference between the means are statistically significant. Secondly, the OLS regressions' results show that the macroeconomic determinants of sovereign ratings are not definite for all countries as specified in the previous studies. The ratings of each country are influenced by different variables with different significance. Furthermore, the subjective component of the OLS model (the part cannot be explained by the economic variables) in Hungary is smaller when compared to the subjective components of South Africa's and Turkey's models, which indicates that the changes in credit ratings is explained by the economic variables mostly in Hungary. Finally, the pooled regression results denote that Turkey is assigned with the least grades without considering the macroeconomic indicators when compared to South Africa and Hungary. Discussion: Though it is maintained that the credit ratings of the sovereigns are mostly determined by their economic indicators, this study shows that these three emerging market economies are not evaluated transparently and fairly by the CRAs. Even if they are classified under emerging market economies, Turkey is assigned by the lowest grades when compared to others. This can be linked with the possibility of intense relations of South Africa and Hungary with advanced economies.

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Pernicious effects: How the credit rating agencies disadvantage emerging markets

Cited by 20 publications

References 65 publications

Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism

Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism

Is Credit Rating Reserved Territory for Credit Rating Agencies? A Multimoora Approach for European Firms and Countries

Are Emerging Market Economies Subject to Credit Rating Bias : Evidence from South Africa, Hungary and Turkey Cases

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