Scope seeks to establish itself as the Europe an alternative to the traditional US agencies in the highly concentrated credit ratings industry. On the sovereign ratings end, it does this in part by using an innovative quantitative ratings model that allows a consistent assessment of the relative strengths of rated sovereign governments, while enhancing ratings transparency and comparability. This quantitative model with a five-year forward looking window under the ratings methodology emphasises structural ratings factors above cyclical, shorter–run economic and market dynamics. In addition, Scope is transparent in regard to the qualitative analyst adjustments it makes to quantitative model ratings in reaching the end-credit rating assignments across a portfolio of 36 sovereign states (including the 27 EU member countries). Figure 1 displays differences between sovereign rating levels for a sample of countries between those as assigned by Scope versus the average rating levels as assigned by the Big Three rating agencies.
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Figure 1: Scope’s sovereign rating levels versus the average rating level from Moody’s, S&P and Fitch (notches) |
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NB. Calculated based on alpha-numeric conversion on a 20-point scale from AAA (20) to D (1). Positive/negative outlooks are treated with a +/-0.33 adjustment. Credit Watch positive/negative with a +/-0.67 adjustment. RoW = Rest of the world. As of 31 July 2020. |
Entering the 2020 economic crisis, Scope entered 2020 having anticipated since 2018 that the global economy was in a late stage of the growth cycle with major risks on the horizon. This expectation of an impending turn in the global economic cycle informed rating actions before this crisis, as reflected in part in the balance of Negative versus Positive ratings Outlooks entering the crisis (Figure 2). As of end-February 2020, namely, around the time period when the corona crisis was first transitioning from a China centric crisis to a global one, Scope had three Positive Outlooks across its 36 rated central governments, that is: for Ireland, Greece and Lithuania, versus five Negative Outlooks: namely, on China, Romania, the UK, Belgium and Turkey. As of the same point in time entering the crisis, peer credit rating agency peers had a balance of rating Outlooks that was more significantly skewed in the direction of Positive Outlooks versus Negative (when looking at only peer rating assignments on the 36 countries rated by Scope, to allow for like-for-like comparison). As such, under this perspective, Scope has needed to, since the crisis escalated, make fewer pro-cyclical downside Outlook revisions.
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Figure 2: Number of Positive versus Negative rating Outlooks, end-February 2020 (before crisis escalation) |
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NB. Outlooks only on the portfolio of 36 countries Scope rates for like-for-like comparison. *Among countries that Scope rates, DBRS does not rate Bulgaria, Croatia, Hungary, Romania, Russia and Turkey (as such, the above is from a sample of 30 rated countries in the case of DBRS). |
Rating actions since this crisis went global reflect this. Figure 3 displays the number of changes to rating levels or Outlooks since March across only the 36 countries rated by Scope. Except in the case of Moody’s, which entered the 2020 crisis with comparatively lower sovereign rating levels than peers, other peer credit rating agencies have taken comparatively more downside actions than Scope has to date. So far, Scope has made four Outlook revisions to Negative (Georgia, Italy, Japan and Slovakia) and one rating downgrade (Turkey). Actions by policymakers to stem liquidity issues and impede private and public sector default, lower borrowing rates near record lows whilst transferring huge stocks of government debt to central bank balance sheets have slowed credit deterioration. So far, Scope has not taken any sovereign rating action outside of its 2020 sovereign rating calendar. That said, the course of this Covid-19 crisis remains unpredictable as coronavirus cases reach daily global peaks and a second transmission wave expected by Scope threatens recovery in mature economies – promising additional economic dislocation over this 2H.
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Figure 3: Number of rating revisions since March 2020 (since crisis escalation) |
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NB. Rating revisions since March 2020 for the 36 countries that Scope rates, through 31 July 2020. *Among countries that Scope rates, DBRS does not rate Bulgaria, Croatia, Hungary, Romania, Russia and Turkey (as such, the above is from a sample of 30 rated countries in the case of DBRS). |
*Alessandro Frazzi, Intern Trainee at Scope Ratings GmbH, supported the writing of this article.
About the author
Dennis Shen is a macroeconomist and a Director in sovereign ratings with Scope Ratings based in Berlin, Germany. Before he joined Scope in 2017, Dennis was a European Economist with Alliance Bernstein in London. Dennis graduated from the MPA in International Development from the London School of Economics in 2013 and completed undergraduate studies at Cornell University, where he graduated from the College of Engineering in 2007.