Factors country ratings

Last weekend the UK lost its AAA status.
BBC < link
"Moody's said the government's debt reduction programme faced significant "challenges" ahead."

Three factors come into play when countries are rated.
But in short, it shows how likely any investor - be it company or government bonds - can expect his invested money back.
Tradionally people/ companies invest in bonds as they tend to be more stable and less subject to ups and downs in the financial market. The down side is that the turn out (investment plus contracted interest) is lower than high(er) risk investments.
Governments issue bonds in order to help them cope with their deficit, so to even their national balance.
The government debt (national debt, public debt) is the debt any govenrment owes to others and have to be paid back.
To get an insight of national debt I used database Datastream, went looking for (national) economics data. Search term debt, and as a source I both checked Eurostat and IMF World Economic Outlook.The fig shows figures from IMF.

 The outome looks like this

Government deficit is the amount of balance between income/ expenditure of any government. If the balance is in the plus, debt will decrease as the can be redeemed, if it is in the minus, debt will grow.
When the government balance isn't in the black or deep in the red govenrment debt will grow. The likeliness that a government will be able to pay his due decreases.

Investors become more and more concerned about their investments or became reluctant to make any in government bonds.










So a govenrment has to promise to pay back a higher interest in order to attract investors. This results in higher interest rates.

Now, there is the rule of thumb that once interest exceeds 7% a government won't be able to pay back his debt. In the international financial world this is the moment when the international community urges the government to austerity and take harsh measures are urged / forced in order to get things back in order. We only need to thin kof Greece.


Bonds in a country threaten to be marked as junk bonds. (very high interest, but the likeliness of getting your money back is low)








(fig: long term interest rates)


Weblecture on country ratings

Benchmark bonds (10y)  10Y Benchmark bonds are related to the interest rates and so an indication of any country's health. In Datastream benchmark bonds can, therefore, be found in Interest rates, instead of Bonds & Convertibles.

What the CRA (Credit rating Agencies) like Moody's, Fitch and S&P do, is base their judgement on the factors mentioned above. But you could also say, thet if a CRA downgrades a country, that it will have a negative effect on its national economoy.
In other words: Credit ratings feed their own downgrading.
And is a country supposed that spiral downward?
It's one of the reasons that some people claim that CRAs should be banned, or at least, given much less credit (pun) than they are granted now.

Links 

Euro countries in distress

S&P Sovereigns rating list

Country rating chart

The Guardian : How CRAs rate countries

Finding data behind sovereign ratings of nations

A live record of an introductory lecture to check economic headlines on its underlying financial data. How do we determine important facts? Where can I find the databases the library offers? How do I find it at the library web site? And a short simulation in finding rating data.

Web lecture credit ratings of nations

In order to view the lecture, it is necessary to be either student or researcher/ teacher at the VU.

More criticism on credit rating agencies

In short: credit rating agencies (CRAs) are companies specializing in investigating credit worthiness (abilty to pay back their loans) of companies and governments. In general concerning certain types of debt obligations like bonds and the debt instruments themselves. Practice is that companies use credit ratings to investigate whether investing in that company would be a good idea or not. But the last couple of years CRAs are primarily known for their ratings of governments and nations, think of Ireland, Greece, Italy and Spain.
In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.

The Big Three (Fitch, Moodies and S&P) failed to perform in two major events having a major import on the world economy: the Internet Bubble Burst (2002) and the Credit Crunch, where they failed to rate an important bank like Leeman Brothers, (giving a AAA shortly before it went bust thus triggering the credit crunch). Criticism on CRAs and their performances, or even questioning the usefulness of their ratings at large were and are inevitable. (one is as important as others think you are)

In 2003 the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.

Considering none of the agencies are as independent as they claim to be (they are all subject to companies paying for their services, one can imagine that it's difficult to be hard on those that 'feed' you. This would make their ratings biased, the least.

July 2011 Angela Merkel suggested Europe, and the EU, are in need of a European counterpart which should be more familiar with the specific situations of the economies in members states.

German chancellor Angela Merkel (link) called Sunday for the creation of a European credit rating agency, on the back of recent discontent over the downgrading of some EU economies. . . . (cut) . . . EU leaders object that Standard & Poor's, Moody's and Fitch are an "oligopoly" issuing self-fulfilling prophecies of doom, greatly aggravating the eurozone debt crisis. (17 Jul 11)

Europe fires back at credit rating agencies (link)

The moves revived calls for the creation of a credit ratings agency in Europe to act as counter-weight in a market dominated by US-based agencies.

“We must break the oligopoly of the ratings agencies,” said German Finance Minister Wolfgang Schaeuble, adding that he wanted to “break” their power and “limit” their influence. . . (cut)  . . . Amadeu Altafaj, the commission’s spokesman for economic affairs, said Moody’s timing was “questionable” and based on “hypothetical scenarios” that contradicted the European Union’s own assessments.

“This is an unfortunate episode and raises once more the issue of the appropriateness of behavior of credit agencies and of their so-called clairvoyance,” he told a news briefing.

US enters war on rating agencies (link) (13 Aug. 2011) . . . The downgrade of the US debt rating for the first time in its history has left the Obama administration with no option but to enter the war. For the first time, the US Treasury department publicly criticised S&P, suggesting that the rating agency‘s estimates of the government’s discretionary spending were 2 trillion dollars too high. The US government is also considering a proposal that would require credit raters to disclose “significant errors” in how they calculate their ratings, as Reuters reported. . . . (cut) . . . Meanwhile, the US Senate Banking Committee is looking into the possibility of holding hearings into the downgrade. Committee chairman Tim Johnson called the agency’s downgrade an “irresponsible move”, which could have a far-reaching impact.

A list of credit rating companies: (links)
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Capital Intelligence (Cyprus)
Capital Standards Rating (Kuwait)
Credo line (Ukraine)
Dagong Global (People's Republic of China)
Dominion Bond Rating Service (Canada)
Egan-Jones Rating Company (U.S.)
Fitch Ratings (U.S./UK)
CIBIL (India)
Japan Credit Rating Agency, Ltd. (Japan)
Moody's Investors Service (U.S.)
Muros Ratings (Russia alternative rating agency) (Russian)
Rapid Ratings International (U.S.)
Standard & Poor's (U.S.)
Weiss Ratings (U.S.)

Prediction:
With the decline of the importance of the traditional large companies and the fast growing economies of BRIC nations (Brazil, Russia, India and China) it's not imaginary that CRAs from those regions will gain influence.

Relate pages on my blog:
Country Risk, country rating, Ireland Rating
Databases offering Debt/credit ratings
Stock rating, debt rating and stock ranking


Sources used: Wikipedia, Athens news, Inquirer Business, The Local - Germany's news in English,

Coping in difficult times - Euro countries in distress

Introduction:

In finance, a bond is a debt security, in which the authorized (this case government) owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

So, a bond acts like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Coupon interest is calculated like thus: interest rate / stock value x 100%

Bondholders have a creditor stake in the company, this differs from stock holders, who own a part of the company.
Originally, a bond was an actual sheet of paper, consisting of two parts: the coupon, and the scrip. The scrip is the IOU.
Bonds are bought and traded mainly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies and banks. Bonds are used as an alternative to stocks, which are more volatile than bonds (making the latter safer). Stocks yield more than bonds, so when stock trade falls, bonds tend to rise.
There are 2 parts to the bond market: Price and yield. When the Price to buy a share of a bond goes UP, it's yield goes DOWN. (When it's more expensive to buy a share of a bond on the market, sales slow, and the yield goes DOWN.) When the price goes low, yield goes up.
When the open stock market goes down, and there is more supply than demand, the money goes to the paces where there is the most opportunity for stable return, which is the bond market.
(For an easy to read explanation see Mortgage Times blog)

Credit crunch and the EuroWe can see this happing since the start of the credit crunch, when governments started trading bonds.
But the instrument as a safe bet is only partially so.
Fixed rate bonds are subject to interest rate risk meaning that their market prices will decrease in value when the generally prevailing interest rates rise. Since the payments are fixed, a decrease in the market price of the bond means an increase in its yield. Bond prices can become volatile depending on the credit rating of the issuer - for instance if the credit rating agencies like Standard and Poor's or Moody's upgrade or downgrade the credit rating of the issuer (see also:  country rating )
A further downgrade could push borrowing costs higher and make it more difficult for governments to meet their debt repayments without seeking help.

This is happening to countries Ireland and Portugal, lately (2nd half 2010), making it very hard for those countries to issues bonds, since those get a very high 'Redemption Yield' ( the amount of money paid for the stock (price including accrued interest and expenses) and relate this to the future dividend and capital payments, either or both of which may be paid net of tax.)

An example from Datastream

A selection of Bonds (Portugal, redemption yield)

But the Benchmark works with 10y Government Bonds, and those are listed under Interest Rates.
Search using the criteria: name Bond (and market: Portugal) > Portugal Benchmark Bond 10 YR (datastream calculated) > it's only one.
Due to its duration and its widespread usage, the 10-year Treasury note is often used as a benchmark for government bonds overall and is considered a financial benchmark for future economic performance on a larger scale. US treasury started using 10 year bonds. (the rest followed suit?)

To get all benchmark bonds use the text benchmark instead of bond (no market)
Now you can compare between countries using (all 10y)
E.g. Germany, Netherlands, Portugal and Ireland.

More information about this topic can be found at Mark Buyneel's Blog

An overview of databases in University Library VU offering ratings data: click here

Country Risk, country rating, Ireland Rating (December 17, 2010-update)

LONDON (October 5th, 2010) —Moody's Investors Service said Tuesday it may cut Ireland's debt rating again, citing the increased cost to the government of repairing the stricken banking system, weak economic growth and rising borrowing costs.

A further downgrade could push Ireland's borrowing costs higher and make it more difficult for the government to meet its debt repayments without seeking help from the European Union's European Financial Stability Fund.

(Click for whole article)
Moody's downgrades Ireland rating (december 17th 2010)

Dutch article:
PARIJS - Moody's verlaagt de beoordeling van de kredietwaardigheid van Ierland, zo maakte de kredietbeoordelaar vrijdag bekend.
Aanleiding zijn de toenemende onzekerheden over de economie en de begroting van het door schulden geplaagde land.
De beoordeling gaat vijf niveaus omlaag, van Aa2 naar Baa1. De verlaging is volgens Moody's gebaseerd op het risico dat de financiële kracht van de overheid verder kan afnemen als de economische groei tegenvalt of als de kosten van het stabiliseren van het banksysteem hoger zijn dan voorspeld.

The information also applies to some extent to Country ratings.

1. Country Risk
Country risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country.

For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk, however country risk is a more general term, which generally only refers to risks affecting all companies operating within a particular country.

Political RiskPolitical risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure. Credit rating agencies tend to use quantitative econometric models and focus on financial analysis, whereas political risk providers tend to use qualitative methods, focusing on political analysis. However, there is no consensus on methodology in assessing credit and political risks.

(source: wikipedia)

2. Country 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. Country risk is evaluated and factored into all A.M. Best ratings. As part of evaluating country risk, A.M. Best identifies the various factors within a country that may directly or indirectly affect an insurance company

Countries are placed into one of five tiers, ranging from Country Risk Tier 1 (CRT-1), denoting a stable environment with the least amount of risk, to Country Risk Tier 5 (CRT-5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer's financial stability, strength and performance.

Source: Ratings & Analysis Center < -- click for site

The site contains free downloadable! Country reports on their financial (political) risk.

3.
Sovereign Risk (Wiki)
Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.

Five macroeconomic variables that affect the probability of sovereign debt rescheduling are:

• Debt service ratio
• Import ratio
• Investment ratio
• Variance of export revenue
• Domestic money supply growth

The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth. Frenkel, Karmann and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.

Global Financial Stability Report (IMF) (Last Updated: December 01, 2010) http://www.imf.org/external/data.htm
http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/text.pdf (the report)

Monthly bulletin of statistics (open accessible)
Government bonds - monthly 2007 - 2010, selected countries Belgium, France, Germany, Ireland, Iceland, Italy, Netherlands and Spain.
The rates are an indication of financial stability of a country. In the case of Ireland you can expect a rise in rate.
2010AUG 5.30
2010JUL 5.32
2010JUN 5.31
2010MAY 4.86 
2010APR 4.76
2010MAR 4.54

Blog Items Databaser
Stock rating, debt rating and stock ranking : < click
Databases with Ratings data in our library  <   click

Standard and Poor's Souvereign ratings and T&C assessment   <    click

This site explains the S&P strategy in rating souvereigns and their  transfer and convertibility (T&C). (most recent 23/Aug/2010) The information is copyrighted, so I will sustain with a link to their site.

More information on the subject can be found at Mark Bruyneel's blog click here
This blog will also explain how to find RISK data in Datastream.

Databases offering Debt/credit ratings

The Vrije Universiteit gives access to several databases offering data on Debt ratings.
Note:
SDC and Datastream only offer the latest ratings. No historic data.
Compustat only North America.
The following pages provide lots of (secondary) information on how the database generally works.

Bankscope (OECD countries)
Bankscope is a Bureau van Dijk database. All these database work through the same kind of itnerface, so when you master one database, you can operate another Bureau van Dijk database (e.e. Amadeus, Reach, Bankscope etc.)

http://finabase.blogspot.nl/search/label/Amadeus
As for credit ratings in Bankscope:
Best is first to create a selection of banks, and once you're done to create the list of selected banks. next you "add" more data to your workset using the ADD link (top right of the list)
Bankscope only provides Fitch ratings.
But, compared to other databases, it does provide historic ratings.
It has to be said that the license does unfortunately not permit the download of these ratings.
The only solution is to screen cap the ratings and insert them in your worket manually.


Compustat (North America, Ratings section)
SPSDRM -- S&P Subordinated Debt Rating
This item represents the issuer subordinated debt rating that has been assigned to a company by Standard & Poor's. (prior to 1.09.1998)
SPLTICRM -- S&P Domestic Long Term Issuer Credit Rating
The Standard & Poor's Issuer Credit Rating (ICR) is a current opinion of an issuer's overall creditworthiness, apart from its ability to repay individual obligations
SPSTICRM -- S&P Domestic Short Term Issuer Credit Rating
The Standard & Poor's Issuer Credit Rating (ICR) is a current opinion of an issuer's overall creditworthiness
SPCSRC -- S&P Quality Ranking - Current
This item is an appraisal of past performance of a stock's earnings and dividends and the stock's relative standing as of a company's current fiscal year-end.

Datastream:
Only Bonds and Convertibles, the latest rating of Moody's and of S&P.
ISPRT- Current rating of a bond from S&P
MRT- Moody’s rating for Bond
BSPF- S&P Current Foreign Credit Rating (Borrower Rating)
BSPL- S&P Current Local Credit Rating (Borrower Rating)
BSPHF - Historic rating

Other datatypes



SDC Mergers and Acquisitions

Executed result
What to do: (example)

Criteria: date announced 2005 - 2008; target nation Netherlands, related debt ratings (search in all by typing).
After adding your criteria, go to top bar select dropdown menu reports and select CUSTOM report. A menu pops up where your own criteria can be added. Go to the All TAB and type in: debt rating.
Add those:


The output result is:



Note: Searches can result in large work sets, so it could be a good idea to 'cut up' yourt search into parts and add several extra limiters.

Important NB on content (31st March 2011): I have noticed that SDC 3.0 does not provide credit ratings in M&A.
SDC (link: explains how to do a basic tear sheet search)

SDC GNI (Global New Issues)

(Issued new stocks. Ratings may influence buyers in buying new stock)


Report Output with ratings: (use Report button in the Top Bar)



Stock ranking, credit/debt rating

Stock rating, debt rating and stock ranking

Definition Stock ratingAn evaluation of a stock's expected performance and/or its risk level as judged by a rating agency such as Standard and Poor's. A stock rating will usually tell the investor how well a stock's market value relates to what analysts believe is a fair value for the stock, based on an objective evaluation of the company. The greater the amount by which the fair value exceeds the market value, the more highly recommended a buy the stock is. Conversely, if the market value of the stock exceeds the fair value of the stock, then analysts recommend that the stock be sold. Most stock rating systems give stocks one to five stars, with five being best. While some investors use a particular analyst's stock ratings as guidance, it is important to evaluate the criteria which they use to determine fair value, since the techniques they use are diverse and not all analysts are equally competent.

You could also interpret the rating as a ranking system in which the highest ranking means very credit worthy.

Debt rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's debt issues. It is analogous to credit ratings for individuals and countries. The credit rating is a financial indicator to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as Moody's, Standard & Poor's, and Fitch to have letter designations (such as AAA, B, CC) which represent the quality of a bond. Bond ratings below BBB/Baa are called junk bonds

Credit rating agencies
In short: credit rating agencies (CRAs) are companies specializing in investigating credit worthiness (abilty to pay back their loans) of companies and governments. In general concerning certain types of debt obligations like bonds and the debt instruments themselves. Practice is that companies use credit ratings to investigate whether investing in that company would be a good idea or not. But the last couple of years CRAs are primarily known for their ratings of governments and nations, think of Ireland, Greece, Italy and Spain.


In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.
Many people are unaware of what the actual debt ratings mean. The Moody's rating is based on statistical calculations of a company's likelihood of default. Most explanations give verbal descriptions for the ratings, such as Aaa = "Highest Rating Available" or Ba = "Low Grade", the first level of "Below Investment Grade" or the first level of "Junk Bonds". These descriptions seem useless without a way to determine what it all means in terms of the likelihood of default on the terms of repayment. To me, what is important is the chance that the company is not going to live up to its obligations, and that means the percentage of companies that default with a given rating. Moody's calculates this information, but it is hard to find a place that shows it.

Ratings by Moody's, Standard and Poors and Fitch


Rating examples:
(highest)

(lowest)

(source wikipedia)

Criticism on the rating system
Untill the 1970 the ratings were done entirely indepentdantly. But in the early 1970s, (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings. Obviously the question arose on the impartiality of the three. One can image that securities issuing companies have an interest in good ratings, and the intention of companies shopping for good ratings, until they get one may be clear. In fact, it is not imaginative that getting ratings this way may have been one of the causes for the credit crunch, given the high ratings CDOs (collateralized debt obligations) and MBSs (mortgage backed securities) got. (High rating: buy, buy buy!)

Interview with John Kiff , Senior Financial Sector Expert Global Financial Stability Division in the Monetary and Capital Markets Department (IMF) on the debt/credit rating system. (Global Financial Stability Report)http://www.imf.org/external/mmedia/view.aspx?vid=619701770001



Sites:
Definition Wikipedia

Standard & Poors
Moody's

See also Databases offering debt/ credit ratings (hyperlink)
IMF Direct Blog (John Kiff)  http://blog-imfdirect.imf.org/
. End the credit rating addiction < blog item