Are Sovereign Credit Ratings Objective? A Tale of Two Agencies

The sovereign credit ratings provided by credit rating agencies have great impact on a country's access to credit markets. To gain access to international credit markets, a country usually seeks ratings from the three biggest international credit rating agencies: Standard & Poor's, Moody's, and Fitch. However, the reliability of credit ratings by these international credit agencies has been under debate and has attracted more attention since the global financial crisis. Studies have demonstrated the differences among the ratings by these biggest rating agencies, but little research has been undertaken on the ratings by other agencies. A Chinese credit rating agency, Dagong, attracted a lot of attention after it first published U.S. ratings below AAA in August 2011, three days before Standard & Poor's downgraded U.S. debt from AAA to AA+. The present paper fills the gap in the literature by examining the differences between the sovereign credit ratings by Standard & Poor's and Dagong. The paper also checks the reliability of these ratings by a regression analysis of the ratings and commonly used sovereign risk indicators. The results indicate that the two rating agencies shared several common indicators in their rating methodologies, but subjective judgments also played a role in the ratings assigned by these two agencies.