Rasha Alsakka

Differences of opinion in sovereign credit signals during the European crisis

Motivated by the European debt crisis and the new European Union regulatory regime for the credit rating industry, we analyse differences of opinion in sovereign credit signals and their influence on European stock markets. Rating disagreements have a significant connection with subsequent negative credit actions by each agency. However, links among Moody’s/Fitch actions and their rating disagreements with other agencies have weakened in the post-regulation period. We also find that only S&P’s negative credit signals affect the own-country stock market and spill over to other European markets, but this is concentrated in the pre-regulation period. Stronger stock market reactions occur when S&P has already assigned a lower rating than Moody’s/Fitch prior to taking a further negative action.

The information content of sovereign watchlist and outlook: S&P versus Moody's

Credit rating agencies play an essential role in global financial markets through the production of credit information and its distribution to market participants. Moody’s Investors Service and Standard & Poor’s (S&P) dominate the global credit rating industry, accounting for 80 per cent of the market (Alsakka and ap Gwilym, 2010a). Rating changes have long been the key means available to signal improving and deteriorating fundamental credit quality. However, rating changes are not the only signals provided by the agencies. Rating outlooks and reviews (the Watchlist) are supplemental tools to communicate potgntial changes in issuer credit quality. Rating outlooks/Watchlists were developed to provide indicators of the likely direction and timing of future rating changes (Hamilton and Cantor, 2004). Therefore, a complete credit opinion from a given rating agency consists of a credit rating and a rating outlook/Watchlist status. One of the criticisms of agencies is their apparently slow reactions in changing ratings. However, because of agencies’ ‘through the cycle’ methodology and the sound reasons for stability in ratings (see Part III), signals from Watchlist and outlook are very likely to be the source whereby the agencies provide most information to financial markets. Despite this, there is little empirical evidence on rating outlook and Watchlist (see Li et al., 2008).