06 Feb 2020

First-mover disadvantage

The sovereign ratings mousetrap

Moritz Kraemer / Patrycja Klusak / Huong Vu

Download Publication


Using 102 sovereigns rated by the three largest credit rating agencies (CRA), S&P, Moody’s and Fitch between January 2000 and January 2019, we are the first to document that the first mover CRA (S&P) in downgrades falls into a commercial trap. Namely, each first-mover downgrade by one notch by S&P results in a 2.4% increase in the probability of a rating contract being cancelled by the sovereign client, and a 1.2% decrease in the ratio of S&P’s sovereign rating coverage relative to Moody’s. The more first-mover downgrades S&P makes, the more their sovereign rating coverage declines relative to Moody’s. This paper interrelates three themes of the literature: herding behaviour amongst CRAs, issues of conflict of interest and ratings quality.

Keywords: Sovereign credit ratings, herding behaviour, conflict of interest

JEL classification: G15, G24

Related Publications

Browse through the list of related publications.

The European added value of the Recovery and Resilience Facility

An assessment of the Austrian, Belgian and German plans

Where the (euro) buck stops

Facing the next big crisis with a better EU budget

The Next Revision of the Financial Regulation and the EU Budget Galaxy

How to safeguard and strengthen budgetary principles and parliamentary oversight

Optimal tariff versus optimal sanction

The case of European gas imports from Russia

Comparing and assessing recovery and resilience plans – Second edition

Italy, Germany, Spain, France, Portugal, Slovakia, Austria and Belgium

When the taps are turned off

How to get Europe through the next winter without Russian gas