Updated Note on Real-Time Sovereign Ratings

Full updated analysis available here.

Key points of the update available here.

In the Covid-19 crisis, the credit standing of sovereign borrowers has suddenly worsened as governments, facing difficult trade-offs between saving lives and the economy, have allowed their deficits to balloon.

The sovereign ratings published by ratings agencies and developed internally by financial institutions provide slow-moving perspectives on country credit quality. First, they are through-the-cycle rather than point-in-time in methodology and, second, they are determined through elaborate bureaucratic procedures that make the resulting credit evaluations far from timely in the middle of a rapidly evolving crisis. For investors and lenders, making the right decision in the crisis requires timely information about the fast-changing situation.

For these reasons, it is highly advisable to look at the information on credit quality implicit in market prices. Credit Default Swap (CDS) spreads provide a distillation of market views on the credit quality of issuers. However, these views are expressed in basis swap spreads rather than in an intuitive way related to standard credit quality grades.

Using a transparent methodology, this research report derives point-in-time or ‘real-time’ ratings and 1 and 5-year default probabilities from Credit Default Swap (CDS) spreads. From the ratings implied by 1-year probabilities, the average rating decline for Europe is 1.1 notches, for Middle East 3.1, for Asia & Pacific 2.2, for South & Latin America 2.8, for Africa 4.5 and for North America 0.0.

The crisis naturally affects credit quality over short periods more than long (as, ultimately, solutions to the medical emergency will surely be found). Hence, when ratings are benchmarked off 5-year CDS-spread implied Probabilities of Default (PDs), the average notch declines are smaller. Based on 5-year probabilities, the average rating drop for Europe is 0.8 notches, Middle East is 1.8, Asia & Pacific is 2.0, South & Latin America is 2.5, Africa is 2.7 and North America is 0.0.

Within Europe, the highest rating drops are seen in Romania, Portugal, Russia and Spain. In the Middle East, the largest drops are in Qatar and Bahrain. In Asia & Pacific, Kazakhstan, Indonesia and Philippines suffer the biggest drops. In South and Latin America, Panama, and Brazil have the largest rating drops. Globally, the largest declines have been in Kazakhstan, Panama, Romania, Qatar, Russia, Peru, Trinidad, Saudi Arabia, Indonesia Bahrain and Ivory Coast. These countries have experienced implied ratings declines ranging from 7 notches in the case of Kazakhstan, Panama and Romania to 5 notches for Bahrain, Ivory Coast, Indonesia, Peru, Saudi Arabia and Trinidad.


This note is an update using more recent data of an earlier Risk Control study with the same title (available here).