This paper is the first to investigate the response of the three largest credit rating agencies to Covid-19, & finds that the economic outlook of a country & government’s response to the health crisis, & not the severity of the pandemic itself, determines the intensity of negative rating actions.
Using 603 sovereign rating actions by the three leading global rating agencies between January and March 2021, we show that severity of sovereign ratings actions is not affected by the intensity of the Covid-19 health crisis (proxied by case and mortality rates).
This report finds that economic repercussions of the pandemic such as economic outlook of a country and governments’ response to the health crisis, and not the severity of the pandemic itself, determine the intensity of negative rating actions.
Contrary to expectations, credit rating agencies pursued mostly a business-as-usual approach and reviewed sovereign ratings when they were due for regulatory purposes rather than in response to the rapid developments of the pandemic.
Despite the disappointing reaction to the ongoing pandemic, sovereign rating news from S&P and Fitch still conveyed price-relevant information to the bond markets.
This working paper is now published in the International Review of Financial Analysis: Volume 78, November 2021, 101879.