A rating agency for Europe: A good idea?
Bernhard Bartels[1]
Beatrice Weder di Mauro[2]
ABSTRACT
76th IAES Conference Philadelphia, October 10-13, 2013
JEL Classification: E62, F34
Keywords: Sovereign Risk, Rating Agencies
In the wake of serial downgrades of European countries, policy makers (e.g. the European Council and the European Parliament) have recently called for the setup of an independent European Rating Agency to act as a counterbalance to the US based Big Three agencies. The oligopolistic market structure with a 95 percent market share and the incorporation of their ratings into the regulations seems to have been sealed the dominance of Standard & Poor’s, Moody’s and Fitch. Add to this the observation that the Big Three are all US based with their headquarters in New York and one can be forgiven for suspecting that European countries may not be given equal treatment when compared to the United States or their English speaking kin.
However, there already are European credit rating agencies. They are not as large and as well-known as the Big Three but completely independent players whose main concern has to be for client’s satisfaction and good reputation.
This paper compares the rating history of the registered European rating agency named Feri EuroRating Services AG – Germany’s largest rating agency – with the Big Three, namely Standard & Poor's, Moody's and Fitch. Using monthly ratings for 56 advanced and emerging economies from June 1999 to October 2012, we explore if Feri behaves differently with respect to the rating level, propensity of down- or upgrade and volatility. In addition, we test for herding behavior among agencies by applying a probit analysis. Finally, we test for "neighborhood bias" using a gravity model.
We find that Feri was more aggressive both in terms of a lower level and a higher propensity to quickly downgrade Euro area problem countries than the Big Three. In general, Feri was quicker to downgrade countries from investment to speculative grade, however, also shows a larger number of reversals. Feri appears to be less stable but also less subject to herding than the Big Three. Finally we do not find evidence for a positive neighborhood bias.
[1] Bernhard Bartels, Research Assistant at the Chair of International Economic Policy, Johannes Gutenberg-University Mainz, Economics Department, Jakob-Welder-Weg 4, 55128 Mainz, Email: bartels@uni-mainz.de, phone: +49-61313923968, fax: +49-61313925053 (corresponding author)
[2] Beatrice Weder, CEPR, United Kingdom & Professor for Economics at Johannes Gutenberg- University Mainz, Germany