Written on 20 Apr 2021 by Dr Moritz Kraemer

Leading from behind: rating agencies’ relaxed reaction to the pandemic

Credit rating agencies are relied upon as leading sources of credit risk information and act as gatekeepers to global debt markets. How well they fulfil their role is a key question when the agencies have taken a business-as-usual approach to sovereign ratings, despite the financial, economic, and social havoc wreaked by the pandemic.

In normal times credit rating agencies (CRAs) do their best to adhere to their rules of assessing credit risk through the business cycle. In fact, this traditional stability is one of the factors that makes ratings valuable inputs for investors, as it saves them from being overwhelmed by volatility and ‘noise’.

But these are not normal times; anything but. The sharp and simultaneous deterioration of economic and fiscal fundamentals across the globe triggered by the onset of the COVID-19 pandemic in 2020 is the worst in living memory. It therefore provides a unique opportunity to observe CRAs’ reaction to sudden shocks.

Have the three market-dominating ratings behemoths (S&P, Moody’s, and Fitch) been jolted out of their routine by the virus’ ferocious advance? While a detailed answer requires some nuance, it is fair to say that their overall reaction has been remarkably subdued.

Between January and August 2020, by which time the first global wave of the pandemic had subsided, the three CRAs issued a total of 71 sovereign rating downgrades on 40 countries between them, affecting 29% of their combined rated sovereign bond portfolio. In a recent paper we find that even compared to previous crises CRAs reacted with considerable caution. For example, S&P, with a coverage of 121 countries, issued 20 downgrades on 19 countries in the six months from February 2020, amounting to 16% of its sovereign portfolio. In comparison, in the six months following the collapse of Lehman Brothers in September 2008, S&P downgraded 31 sovereigns, or 25% of its (then smaller) sovereign portfolio (Kraemer, 2020).

Why should the severe contraction during COVID-19 induce such a muted reaction?

One potential consideration is the CRA’s business-as-usual scheduling of ratings committees. The frequency of sovereign ratings reviews is subject to regulation. For example, for sovereigns followed by rating analysts based in the EU, CRAs are required to publicly announce ratings reviews on two to three dates in the upcoming calendar year. 

Regulations do permit CRAs to conduct reviews ahead of schedule when circumstances require; the pandemic sweeping the planet, triggering waves of economic shutdowns was a qualifying example.  And indeed, rating agencies have in some instances made use of the flexibility to bring their committee meetings forward.

But a key finding of our work is that this time the agencies largely stuck to a business-as-usual mode, reviewing ratings close to the scheduled dates set before the pandemic. For each month that had passed since the preceding rating review, the probability of a downgrade increased by 0.2%. Yet if sovereign credit committees had met independently of the regulatory review dates, on a strictly as-needed basis, the time that lapsed since the previous review should not have had any impact and the corresponding coefficient would not be distinguishable from zero.  The fact that the coefficient is positive and highly significant provides evidence that the CRAs did in many instances wait until a review was due and then reduce the rating or outlook, as the situation demanded.

This is an important and surprising finding. Amid a profoundly disruptive pandemic, which clearly constituted an external unanticipated shock, the case for an accelerated review seems overwhelming. Nevertheless, it did not happen as one might have expected. In the world of banks or asset managers, as opposed to CRAs, no investment committee would have afforded itself the luxury of failing to review their each and every exposure immediately when the environment is changing as dramatically as it did last year. Rating agencies, on the other hand allowed themselves to take a more staggered and sequential approach in reassessing the credit risks in their rated portfolio.


The leisurely pace in the fast-evolving risk landscape may be a result of the fact that there is so little competition in their field of business. Also, unlike banks or fund managers, they have no financial ‘skin in the game’, and did not stand to lose money from late decisions. The unrushed approach may also be due to more mundane reasons, such as insufficient analytical resource to conduct a much larger number of credit committees than in the more normal environment. None of these reasons are necessarily reassuring for the seamless functioning such critical cogs in the global capital market machine.

Our findings have implications for CRAs, policymakers, investors, and sovereigns alike. When scheduling sovereign rating committees, the CRAs, even in times of exceptional stress, still seem to be driven in many cases by the regulatory requirement to do so at predetermined intervals. This carries economic repercussions as far as ratings quality and transparency to the market is concerned. Market participants should have a right to expect that when fundamentals change as quickly as they did in 2020, a rating review of the sovereign should be conducted without delay. Ratings users depend on the CRAs providing timely and accurate opinions. In many cases, waiting until the next rating review is due under the regulatory timetable is not an effective way to respond to the needs of investors and other rating users.

Working paper: Leading from behind: Sovereign credit ratings during the COVID-19 pandemic

  • About the author

    Dr Moritz Kraemer

    Dr Moritz Kraemer is an international economist and expert in credit analysis and economic policy. Moritz is Chief Economic Advisor of Acreditus, a UAE-based risk consultancy firm, and Independent Non-Executive Director of Scope Ratings, the largest Europe-headquartered Credit Rating Agency. He started his career as an Economist at the Inter-American Development Bank in Washington, D.C. before joining S&P Global Ratings in London in 2001, co-heading the firm’s Frankfurt branch (2013-2018) and recently the Sovereign Ratings Group’ Global Chief Ratings Officer. Moritz has been a prolific public speaker and thought leader in the field of ratings but was also heavily engaged in several far-reaching change management projects, interacting with senior officials in over 100 countries across the globe. Moritz holds a Ph.D. in Economics from the University of Göttingen (Germany). He studied Economics, Latin American Studies and Literature in Frankfurt, Southampton and San Diego. He currently teaches graduate courses at Goethe-University Frankfurt’s House of Finance and the Centre International de Formation Européene (Nice).