Monday, August 15, 2011

S&P's track record on sovereign risk

Not pretty, reports WSJ which did some research covering the last 35 years.  If a government is rated single-A or better, the news is good -- none defaulted over this time period.  But the ratings do a poor job discriminating in the B range.  The best example: Brazil and Argentina were both rated double B minus in January 2001.  One year later, Argentina defaulted on its debt whereas Brazil has grown steadily over the last 10 years. 

In practice, the bond market forces default-probable countries to pay an interest rate premium.  So what are the ratings agencies really doing to create value when they assess sovereign risk?

3 comments:

  1. Perhaps the question is "what are the ratings agencies doing to create value?"

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