S&P Revises Criteria for Sovereign Ratings

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June 30, 2011 by KATY BURNE
NEW YORK—Standard & Poor's Ratings Services published updated criteria for rating sovereign debt on Thursday, planning to introduce the new measures with immediate effect.
The move follows a request for comments on its methodology, which ended in November last year.
S&P said its aim was to better educate the market about how it rates sovereign debt, both local currency and foreign-currency instruments, and to incorporate factors it observed during the financial crisis.
"This criteria update is part of a series of transparency initiatives we are undertaking to help investors better understand the meaning of our ratings, how we arrive at particular ratings and what can cause ratings to change," the rating agency said in a statement.
The new criteria apply to all 126 sovereigns that S&P rates, and any changes in their ratings should be decided within the next six months.
As a result of the updated methodology, S&P expects there will be a limited impact on sovereign foreign-currency ratings, with perhaps a few countries moving up or down by a single notch, and that the gap between local currency and foreign-currency ratings may narrow in about a third of cases.
Local-currency ratings are generally up to two notches above foreign-currency ratings because of a sovereign's ability to exercise certain powers within its own borders, for example through banking regulation.
One aspect S&P said it focused on when revising its criteria is each sovereign's ties to its financial sector and how sovereigns should be viewed in the context of a monetary union.
Since 1975, an average of 1% of high-grade sovereigns S&P rates have defaulted on foreign-currency debt within 15 years, compared with 30% for below investment-grade sovereigns.
Source: Wallstreet
 
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