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Moody’s Alters Sovereign Rating Method to Better Assess Risk

Moody’s (MCO) Investors Service, the world’s second-biggest credit rating company, is changing the way it assigns rankings to government debt. Investors disagree with their assessments more than half the time.

The changes include more detail on how Moody’s thinks about economic, institutional and fiscal strength, as well as vulnerability to shocks such as banking and foreign-exchange crises that could increase the risk of default, the ratings company said in a report today.

Global bond yields showed investors ignored 56 percent of Moody’s and 50 percent of rival Standard & Poor’s rating and outlook changes last year, more often than not disagreeing when the companies said governments were becoming safer or more risky, data compiled by Bloomberg show.

“The aim of this methodology is to enable issuers, investors and other interested market participants to understand how Moody’s assesses credit risk in this sector,” the company wrote in the report. “Our objective is for users to be able to estimate the likely credit rating for a sovereign within a three notch alpha-numeric rating range in most cases.”

New York-based Moody’s has lowered ratings on about 2.5 sovereigns for each that it’s upgraded this year, according to data compiled by Bloomberg. Portugal, Greece and Ireland are among countries that claim sovereign-debt downgrades triggered their need for bailouts from the European Union and the International Monetary Fund.

Photographer: Scott Eells/Bloomberg

A pedestrian passes in front of the Moody's Investors Service Inc. headquarters in New York. Close

A pedestrian passes in front of the Moody's Investors Service Inc. headquarters in New York.

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Photographer: Scott Eells/Bloomberg

A pedestrian passes in front of the Moody's Investors Service Inc. headquarters in New York.

Default Risks

Moody’s said in today’s report that a review of the performance of its sovereign ratings since 1983 shows its ratings “accurately rank-order sovereign default risk.”

“In modern times, no sovereign government has defaulted on its debt within a year of holding an investment-grade rating,” it said.

For junk issuers, governments with B ratings have been 4.4 times more likely to miss payments over a 12-month horizon than peers with Ba grades, according to the report. Sovereigns with the lowest non-investment rankings, from Caa to C, have been 11.7 times more likely to default than those with B ratings, it said. Today’s adjustments haven’t led to any changes in Moody’s current sovereign ratings, the risk assessor said.

Soured Debt

The revised methodology supersedes material published in September 2008 and another report published in February 2010. Refinements to its analytical approach were outlined in a request for comment which Moody’s published in December. Moody’s “received significant market commentary which we have sought to address where appropriate,” it said today.

Ratings companies were blamed for contributing to the 2008 financial crisis by giving top investment-grade ratings to mortgage-backed securities and collateralized debt obligations that ultimately went sour, losing investors billions of dollars. Moody’s, the world’s second-largest credit-rating company, has come under fire for its ratings methodology in the past and in July was sued by liquidators of two collapsed Bear Stearns Cos. hedge funds seeking more than $1 billion over allegedly faulty investment grades.

In August 2011, S&P downgraded the U.S.’s 60-year-running AAA credit rating to AA+ with a negative outlook. McGraw Hill Financial Inc., the company which owns S&P, has called a $5 billion fraud lawsuit filed against it by the federal government “retaliation” for its downgrade of U.S. creditworthiness.

To contact the reporters on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net; Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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