S&P Says Its Sovereign Ratings Are Effective Indicators of Default Risk

Standard & Poor’s says its sovereign ratings have been effective indicators of default risk of governments worldwide on relative and absolute bases, according to its latest annual study on the performance and default rates of its global sovereign ratings.

The study, Sovereign Defaults And Rating Transition Data, 2010 Update, shows that since 1975, on average only 1.0% of investment-grade sovereigns (those rated ‘BBB-’ and above) have defaulted on their foreign-currency obligations within 15 years compared with 28.6% of those in the speculative-grade category.

Other findings:

• The relative rank ordering of sovereign ratings has been consistent with historical default experience.
• Sovereign ratings have exhibited greater stability at higher rating levels than at lower levels.
• Sovereign ratings have been no more volatile than other credit ratings of private-sector corporations and financial institutions; large rating movements in either direction are the exception and not the rule, even over several years.
• The sovereign rating default experience has been in line with Basel II reference default rates, even though default rates for individual years vary widely.
• Over the last 16 years, we’ve raised more foreign-currency sovereign credit ratings than we’ve lowered. However, judging from the greater number of negative outlooks on sovereigns than positive outlooks, downgrades could outnumber upgrades in 2011 as they did in 2008 and 2009.