Determination of Sovereign Credit Rating Model for European Countries

Akin, Isik ORCID: https://orcid.org/0000-1111-2222-3333 (2021) Determination of Sovereign Credit Rating Model for European Countries. Financial Markets, Institutions and Risks, 5 (3). pp. 45-58. ISSN Print: 2521-1250 Online: 2521-1242

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Abstract

Credit rating agencies play a key role in financial markets, as they help to reduce asymmetric information among market participants via credit ratings. The credit ratings determined by the credit rating agencies reflect the opinion of whether a country can fulfil the liability or its credit reliability at a particular time. Therefore,
credit ratings are a very valuable tool, especially for investors. In addition, the issue that credit rating agencies are generally criticised is that they are unsuccessful in times of financial crisis. Credit rating methodologies of credit rating agencies have been subject to intense criticism, especially after the 2007/08 Global Financial Crisis. Some of the criticised issues are that credit rating agencies’ methodologies are not transparent; they are unable to make ratings on time, and they make incorrect ratings. In order to create a more reliable credit rating methodology, the credit rating industry and the ratings determined by rating agencies need to be critically examined and further investigated in this area. For this reason, in this study credit rating model has been developed for countries. Supervisory and regulatory variables, political indicators and macroeconomic factors were used as independent variables for the sovereign credit rating model. As a result of the study, the new sovereign credit rating calculates exactly the same credit rating with Fitch Rating Agency for developed countries, but there are 1 or 2 points differences for developing countries. In order to better understand the reason for these differences, credit rating agencies need to make their methodologies more transparent and disclose them to the public.

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