The home bias in sovereign ratings

by on January 23, 2014 at 12:46 am in Economics | Permalink

There is a new and intriguing paper on this topic, by Andreas Fuchs and Kai Gehring, the abstract is this:

Credit rating agencies are frequently criticized for producing sovereign ratings that do not accurately reflect the economic and political fundamentals of rated countries. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and culture. Using data from nine agencies based in six countries, we investigate empirically if there is systematic evidence for a home bias in sovereign ratings. Specifically, we use dyadic panel data to test whether, all else being equal, agencies assign better ratings to their home countries, as well as to countries economically, politically and culturally aligned with them.

While most of the variation in ratings is explained by the fundamentals of rated countries, our results provide empirical support for the existence of a home bias in sovereign ratings. We find that the bias becomes more accentuated following the onset of the Global Financial Crisis and appears to be driven by economic and cultural ties, not geopolitics.

The paper has been covered by FT Alphaville, by China Daily, and by Der Spiegel (in German).

Steve Sailer January 23, 2014 at 2:53 am

Here we are, over five years after the Global Financial Crisis, and how much have the credit ratings agencies been punished for their collusion in the fraud and negligence in the subprime market? Why shouldn’t they have gone out of business the way Arthur Anderson went out of business for signing off on Enron’s audits? Heck, I’ve barely heard anybody even mention that Mr. Integrity, Warren Buffett himself, owned 20% of Moody’s on 9/15/08.

Axa January 23, 2014 at 8:55 am

I don’t know the details, but Moody’s (MOC) is a publicily traded company with a board of directors. Shareholders, if not on the board, have limited liabilities.

Steve Sailer January 23, 2014 at 4:35 pm

“Limited liability” shouldn’t mean not liability to reputations. Buffett was a massive shareholder in Moody’s and likely controlled several seats on its board while Moody’s was helping destroy the American economy through self-interested negligence if not fraud. Why so little criticism of St. Warren over Moody’s?

8 January 23, 2014 at 4:07 am

Did Geithner Threaten S&P’s Chairman?

Ratings agencies were notoriously bad on all debt, and they still don’t downgrade debt until a crisis is in full bloom. Everyone knows they are a joke, but they are helpful for the shorts because their eventual downgrades always come when things are already moving to the downside. A rating of junk on Japanese debt today would cause a ripple in the market that will be recovered aftet economists and analysts explaining why the rating is garbage. But if the yen falls 20% over the course of a few weeks and JGBs are sinking fast, then the ratings agency will come in and release a hope destroying ratings downgrade that sinks the market.

maros. January 23, 2014 at 5:43 am

“A rating of junk on Japanese debt today would cause…” nothing, just as S&P’s downgrade of US government bonds caused nothing. Most of Japanese debt is held by Japanese, who couldn’t care less about the opinion of a selected group of private US corporations called rating agencies.

8 January 23, 2014 at 7:05 am

Price isn’t set by who owns an asset, but who wants to buy it.

Michael January 23, 2014 at 7:47 am

Most Japanese debt is bought by the Japanese too.

Steve January 23, 2014 at 11:15 am

maros. I don’t know what you’re talking about. I remember August 2011 very well “On 8 August, the S&P 500 lost 79.92 points (6.7%) to 1,119.46.” That was a significant drop.

SomeGuy January 23, 2014 at 1:34 pm

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