 1.58%; Germany (AAA) 0.58% and France (AA+), 0.90%.
For low rated countries such as Greece (CCC), the rate is as high as 8.33%.
But more importantly downgrades from investment grade to non-investment grade can elicit unfavourable, and costly, market reactions. For example, South Africa is just a notch above investment grade rating by both Standard & Poor’s and Fitch. Any further downgrade would cause a significant escalation in the cost of raising finances. That’s why countries pay a lot of attention to their credit ratings.
How objective are they?
Like any human institution, the rating agencies cannot be said to be perfect. The recent global financial crisis demonstrated this. That said, by and large, the credit rating agencies have been found credible and transparent in the methodologies used in their assessments.
The critical variables that go into the assessment and rating of sovereigns for instance, include information on:
macroeconomic outcomes such as economic growth;
the state of public finances;
the external finance situation including exchange rate management;
political risk; and
the performance of state institutions.
Naturally, when countries, municipalities and companies are downgraded the rating agencies are heavily criticised. But a review of the rating performances often suggests a strong correlation between the ratings countries get and their propensity to default. For example, historically triple A issuers and issues have defaulted less frequently as compared with those with lower credit ratings. Indeed, lower-rate issues and issuers have usually correlated with defaults across all the leading rating agencies.
Each of the three leading rating agencies has a well-defined methodology for assigning ratings. In most instances, ratings committees vote on the rating outcomes before they are published. In most cases these committees are made up of a lead analyst, managing directors or supervisors as well as a number of junior analytical staff. Decisions are made by a simple majority of the committee. The agency’s reports are also made available to the issuer for factual verification.
How accurate are they?
Governments have from time to time questioned the opinions of the credit rating agencies. Developed world countries such as the US and France have strongly criticised major agencies because of a downgrade.
But this has not stopped agencies from sticking to their guns. An International Monetary Fund review suggests that since 1975 all the sovereigns that have defaulted were rated as non-investment grade at least one year before they defaulted. Between 1983 and 2009 no country with investment grade rating defaulted.
And just about 1% of the corporations rated as investment grade risk defaulted over the period in question. These statistic speaks volumes about the credibility of the risk assessment opinions of the top three agencies.