Original scientific paper
Autor: Nataša Kožul PhD
SCINDEX
Summary: Credit ratings by independent agencies, such as Moody’s Investor Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch) are a cornerstone of investment strategies. The agencies are at the core of global credit risk architecture. Their evaluations have always been heavily relied upon by investors, in particular in recent years, when various credit derivatives contingent on a counterparty creditworthiness and probability of default emerged. The popularity of credit ratings stems not only from their simplicity, whereby a wealth of data and analysis is represented by a single symbol, but also by the fact that they are supposed to provide an independent, objective and absolute evaluation of the entity’s ability to repay debt. Given the unique role of governments and its authority to enforce regulative, legal, taxation and other measures, issue currency, form monetary and foreign policies etc., sovereign credit ratings are fundamental elements of the global credit rating structure. Typically, credit rating of a sovereign government provides the ceiling for ratings of other entities in a given country, with its bond yields as a benchmark against which other debt securities are measured. However, given that credit ratings often imply some level of comparison, their objectivity is questionable. Moreover, recent US credit downgrade by S&P from AAA to AA+, as well as the Moody’s downgrade of 12 UK banks’ and building societies’ credit ratings, followed by the decline in ratings of Spain and Italy, has brought into questioning the relevance of these measures. As a result, this paper aims to present the key elements underlying the credit rating methodology in order to identify benefits and shortcomings of its use in investment decisions.