Credit rating#Short-term rating

A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.

The "country risk rankings" table shows the ten least-risky countries for investment {{as of|2018|January|lc=y}}. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries, with Singapore often emerging as the least risky country since 2017 – it is also one of the only few countries in the world as well as the only in Asia to achieve a AAA sovereign credit rankings from all major credit agencies.{{cite web |last1=Wright |first1=Chris |title=Singapore leads the world in sovereign risk |url=https://www.euromoney.com/article/b12khpchzd4ypn/singapore-leads-the-world-in-sovereign-risk |website=Euromoney |access-date=26 May 2022 |language=en |date=9 March 2017}}{{cite web|url=https://www.euromoney.com/research-and-awards/surveys-and-awards/country-risk-survey|title=Country risk survey|publisher=Euromoney.com|access-date=2018-01-16|archive-date=2018-10-01|archive-url=https://web.archive.org/web/20181001104148/https://www.euromoney.com/research-and-awards/surveys-and-awards/country-risk-survey|url-status=dead}}

Results focus foremost on economics, specifically sovereign default risk or payment default risk for exporters (also known as a trade credit risk). A. M. Best defines "country risk" as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations.{{cite web|url=http://www3.ambest.com/ratings/cr/crisk.aspx?l=1&Menu=Country+Risk |title=Country Risk |publisher=ambest.com |access-date=2011-08-08}}

A rating expresses the likelihood that the rated party will go into default within a given time horizon. In general, a time horizon of one year or under is considered short term, and anything above that is considered long term. In the past institutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used.{{citation needed|date=June 2012}}

{{Main|Bond credit rating}}

Credit ratings can address a corporation's financial instruments i.e. debt security such as a bond, but also the corporations itself. Ratings are assigned by credit rating agencies, the largest of which are Standard & Poor's, Moody's and Fitch Ratings. They use letter designations such as A, B, C. Higher grades are intended to represent a lower probability of default.

Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues…" (Standard and Poors' definition of an AAA-rated and a BB-rated bond respectively).{{cite book |title= The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness |last=Sinclair |first=Timothy J. |author-link=Timothy J. Sinclair |year=2005 |publisher=Cornell University Press |location=Ithaca, NY |isbn= 978-0-80147491-0 |page= 36, Bond Rating Symbols and Definitions, Table 2 |url=http://www.cornellpress.cornell.edu/book/?GCOI=80140100511490 |access-date=21 September 2013}} However, some studies have estimated the average risk and reward of bonds by rating. One study by Moody'sCantor, R., Hamilton, D.T., Kim, F., and Ou, S., 2007 Corporate default and recovery rates. 1920–2006, Special Comment: Moody's investor Service, June Report 102071, 1-48 page 24cited by authors Herwig Langohr and Patricia Langohr claimed that over a "5-year time horizon" bonds it gave its highest rating (Aaa) to had a "cumulative default rate" of 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer period, it stated "the order is by and large, but not exactly, preserved".{{cite book|last=Langohr|first=Herwig|title=The Rating Agencies and Their Credit Ratings: What They Are, How They Work|year= 2010 |publisher= Wiley|page=48|url= https://books.google.com/books?id=uChX5RuyDT4C&pg=PA48 |author2=Patricia Langohr|isbn=9780470714355}}

Another study in Journal of Finance calculated the additional interest rate or "spread" corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds' rating. (See "Basis point spread" in table to right.) Looking at rated bonds for 1973–89, the authors found a AAA-rated bond paid 43 "basis points" (or 43/100 of a percentage point) over a US Treasury bond (so that it would yield 3.43% if the Treasury yielded 3.00%). A CCC-rated "junk" (or speculative) bond, on the other hand, paid over 7% (724 basis points) more than a Treasury bond on average over that period.{{cite news |title=The credit rating industry |last1=Cantor |first1= Richard |last2=Packer |first2=Frank |date=Summer–Fall 1994 |work=Federal Reserve Bank of New York Quarterly Review |publisher=Federal Reserve Bank of New York |url= http://www.newyorkfed.org/research/quarterly_review/1994v19/v19n2article1.pdf |issn=0147-6580 |page=10 |archive-url= https://web.archive.org/web/20110429062213/http://www.newyorkfed.org/research/quarterly_review/1994v19/v19n2article1.pdf |archive-date=2011-04-29}}from Altman, Edward I "Measuring Corporate Bond Mortality and Performance" Journal of Finance, (September 1989) pp. 909–22

Different rating agencies may use variations of an alphabetical combination of lowercase and uppercase letters, with either plus or minus signs or numbers added to further fine-tune the rating (see colored chart). The Standard & Poor's rating scale uses uppercase letters and pluses and minuses.{{cite book |author1 = de Servigny, Arnaud |author2 =Olivier Renault | title = The Standard & Poor's Guide to Measuring and Managing Credit Risk | year = 2004 |publisher = McGraw-Hill | isbn=978-0-07-141755-6}}

The Moody's rating system uses numbers and lowercase letters as well as uppercase.

While Moody's, S&P and Fitch Ratings control approximately 95% of the credit ratings business,{{cite web|last=Alessi|first=Christopher|title=The Credit Rating Controversy. Campaign 2012|url=http://www.cfr.org/united-states/credit-rating-controversy/p22328|publisher=Council on Foreign Relations|access-date=29 May 2013|archive-url=https://web.archive.org/web/20130727223220/http://www.cfr.org/united-states/credit-rating-controversy/p22328|archive-date=27 July 2013|url-status=dead}} they are not the only rating agencies. DBRS's long-term ratings scale is somewhat similar to Standard & Poor's and Fitch Ratings with the words high and low replacing the + and −. It goes as follows, from excellent to poor: AAA, AA (high), AA, AA (low), A (high), A, A (low), BBB (high), BBB, BBB (low), BB (high), BB, BB (low), B (high), B, B (low), CCC (high), CCC, CCC (low), CC (high), CC, CC (low), C (high), C, C (low) and D. The short-term ratings often map to long-term ratings though there is room for exceptions at the high or low side of each equivalent.{{cite web|title=DBRS: Short-Term and Long-Term Rating Relationships|url=http://dbrs.com/research/236758/short-term-and-long-term-rating-relationships.pdf|url-status=dead|archive-url=https://web.archive.org/web/20110428070308/http://dbrs.com/research/236758/short-term-and-long-term-rating-relationships.pdf|archive-date=2011-04-28|publisher=DBRS|access-date=2013-06-28}}

S&P, Moody's, Fitch and DBRS are the only four ratings agencies that are recognized by the European Central Bank (ECB) for determining collateral requirements for banks to borrow from the central bank. The ECB uses a first, best rule among the four agencies that have the designated ECAI status,{{cite web|title=External credit assessment institution source (ECAIs)|url=http://www.ecb.europa.eu/paym/coll/elisss/ecai/html/index.en.html|publisher=European Central Bank|access-date=21 January 2014|archive-url=https://web.archive.org/web/20140203115705/http://www.ecb.europa.eu/paym/coll/elisss/ecai/html/index.en.html|archive-date=3 February 2014|url-status=dead}} which means that it takes the highest rating among the four agencies – S&P, Moody's, Fitch and DBRS – to determine haircuts and collateral requirements for borrowing. Ratings in Europe have been under close scrutiny, particularly the highest ratings given to countries like Spain, Ireland and Italy, because they affect how much banks can borrow against sovereign debt they hold.{{cite news|last=Jones|first=Marc|title=First crunch date in Europe's ratings calendar is April 11|url=https://www.reuters.com/article/ratings-spain-italy-idUSL6N0JY3OD20131219|access-date=21 January 2014|newspaper=Reuters|date=19 December 2013}}

A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A−, B++, B+, B, B−, C++, C+, C, C−, D, E, F, and S. The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS grades are mapped to one-year probability of default.

Under the EU Credit Rating Agency Regulation (CRAR), the European Banking Authority has developed a series of mapping tables that map ratings to the "Credit Quality Steps" (CQS) as set out in regulatory capital rules and map the CQS to short run and long run benchmark default rates. These are provided in the table below:

{{Reflist|2}}

• {{Commons category-inline|Credit rating}}
• [https://quickloan.com.sg/credit-score-guide-singapore Singapore Credit Score Guide]

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Category:Credit

Category:Rating systems