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How’s my rating? Moody’s wants to hear from you

© Mike Segar / Reuters/REUTERS

Are you mad that the U.S. is no longer rated AAA? Do you think France's sovereign debt rating is too high relative to Canada's?

Moody's wants to hear from you.

For the first time since 2008, the rating agency is proposing a new methodology to grade sovereign credits. To make sure it gets the new scale right, it wants to hear from the people these ratings affect, which more or less includes everyone in the fixed-income world, because all bonds are priced off a spread to sovereign debt.

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In its new methodology Moody's is making a number of changes, all of which are detailed here , but overall the new score card puts more emphasis on 'sub-factors' that affect sovereign credits, such as the strength of the country's banking system and market funding stress.

Moody's is also paying more attention to abrupt market shocks, and how quickly a government can deal with them. "Our analysis of past sovereign defaults indicates that a number of sovereign defaults have occurred in the aftermath of exogenous shocks such as banking crises and foreign-exchange crises."

The rating agency is also looking at different economic metrics. In the past, it used World Bank statistics such as per capita wealth, but will now rely on fundamentals such as average real GDP growth and global competitiveness, and will rely more heavily on things like measurements of inflation, which reflect a central bank's credibility.

Moody's didn't offer any explicit reasons as to why it is updating its methodology now, but a recent Bloomberg analysis found that "investors ignored 56 per cent of Moody's rating outlook changes [in 2012] and 50 per cent of those by S&P." Whether or not the investors were correct is still up in the air.

Anyone interested in commenting on Moody's new methodology can send comments to before February 1, 2013.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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