The Country Ceiling and Sovereign Rating Relationship Exemplified by the Case of Poland

Authors

DOI:

https://doi.org/10.18778/0208-6018.354.01

Keywords:

country ceiling, sovereign rating, country risk, credit rating

Abstract

The aim of the article is to answer the question whether the ratings of entities registered in Poland are limited by the sovereign rating of the country. The author theorises that the sovereign rating of Poland does not constitute the upper limit for ratings granted by the Big Three (Fitch Ratings, Moody’s and Standard & Poor’s) to Polish financial and non‑financial entities. The databases of three leading rating agencies were queried, selecting all (52) long‑term foreign ratings assigned to entities registered in Poland. The analysis indicates that currently no confirmation can be found of the use of the country ceiling principle, according to which the rating of any entity registered in a given country cannot be higher than its sovereign rating, by rating agencies (7.7% of rated entities in Poland is given higher rating than the sovereign one). This is at the same time a higher percentage than the average for all Big Three ratings, amounting to approx. 3%. The country ceiling is an upper, potential sovereign rating bound, resulting from the T&C risk. In the case of entities registered in Poland, however, their rating is a maximum of one notch higher than the sovereign rating, which in turn is in line with the policy that Standard & Poor’s officially announced as the only agency among the Big Three (the rating of an entity registered in a given jurisdiction can be up to four notches higher than the sovereign rating). The analysis of ratings assigned to Polish entities also indicates that a rating above the sovereign rating awarded by a given credit rating agency does not translate into similar actions of other agencies. This paper analyses the relationships between the concepts of country risk, T&C risk and sovereign risk. Another original contribution is establishing how the country ceiling principle used by rating agencies works in practice and verifying the scope of application of this principle in the Polish economic reality.

Downloads

Download data is not yet available.

References

Afonso A. (2003), Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies, “Journal of Economics and Finance”, vol. 27(1), pp. 56–74.
Google Scholar

Almeida H., Cunha I., Ferreira M. A., Restrepo F. (2017), The Real Effects of Credit Ratings: The Sovereign Ceiling Channel, “The Journal of Finance”, vol. 72, issue 1, pp. 249–290.
Google Scholar

Bissoondoyal-Bheenick E. (2005), An analysis of the determinants of sovereign ratings, “Global Finance Journal”, vol. 15(3), pp. 251–280.
Google Scholar

Borensztein E., Cowan K., Valenzuela P. (2007), Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies, “IMF Working Paper” WP/07/75.
Google Scholar

Butler A. W., Fauver L. (2006), Institutional environment and sovereign credit ratings, “Financial Management”, vol. 35(3), pp. 53–79.
Google Scholar

Cantor R., Packer F. (1996), Determinants and impact of sovereign credit ratings, “FRBNY Economic Policy Review”, vol. 2, no. 2, pp. 37–53.
Google Scholar

Durbin E., Ng T. D. (1999), Uncovering Country Risk in Emerging Market Bond Prices, “IMF Work Paper”, no 639.
Google Scholar

Erdem O., Varlı Y. (2014), Understanding the sovereign credit rating of emerging markets, “Emerging Market Review”, no. 20, pp. 42–57.
Google Scholar

Fitch Ratings (2018a), Country Ceilings Criteria – Effective from 19 July 2018 to 5 July 2019, https://www.fitchratings.com/site/re/10037793 [accessed: 11.01.2020].
Google Scholar

Fitch Ratings (2018b), Sovereign Rating Criteria – Effective from 23 March 2018 to 19 July 2018, https://www.fitchratings.com/research/sovereigns/sovereign-rating-criteria-effective-from-23-march-2018-to-19-july-2018-23-03-2018 [accessed: 25.06.2021].
Google Scholar

Korzeb Z., Kulpaka P., Niedziółka P. (2019), Deoligopolizacja rynku agencji ratingowych oraz inne inicjatywy na rzecz poprawy jakości ratingów zewnętrznych w kontekście oddziaływania agencji ratingowych na stabilność finansową, “Materiały i Studia”, nr 333, Narodowy Bank Polski, Warszawa.
Google Scholar

Moody’s (2018), Procedures and Methodologies Used to Determine Credit Ratings, https://www.moodys.com/sites/products/ProductAttachments/Exhibit2.pdf [accessed: 18.06.2019].
Google Scholar

Moody’s (2021), How Moody’s Rates Sovereigns and Supranational Entities, https://www.moodys.com/Pages/HowMoodysRatesSovereigns.aspx?stop_mobi=yes [accessed: 25.06.2021].
Google Scholar

Peter M., Grandes M. (2005), How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa, “IMF Working Paper” 05/217.
Google Scholar

Pretorius M., Botha I. (2017), The Determinants of Sovereign Credit Ratings in Africa: A Regional Perspective, [in:] N. Tsounis, A. Vlachvei (eds.), Advances in Applied Economic Research, Springer, Cham, pp. 549–563.
Google Scholar

Reusens P., Croux Ch. (2017), Sovereign credit rating determinants: A comparison before and after the European debt crisis, “Journal of Banking & Finance”, vol. 77, issue C, pp. 108–121.
Google Scholar

Rowland P. (2004), Determinants of Spread and Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis, “Borradores de Economia”, no. 296, https://www.banrep.gov.co/sites/default/files/publicaciones/archivos/borra296.pdf [accessed: 25.06.2021].
Google Scholar

Ryan V. (2013), Corporate, Sovereign Debt Ratings Closely Linked: S&P, https://www.cfo.com/credit/2013/04/corporate-sovereign-debt-ratings-closely-linked-sp/ [accessed: 9.07.2020].
Google Scholar

Sehgal S., Mathur S., Arora M., Gupta L. (2018), Sovereign ratings: Determinants and policy implications for India, “IIMB Management Review”, no. 30, pp. 140–159.
Google Scholar

Standard & Poor’s (2013), Ratings above the sovereign – corporate and government ratings: methodology and assumptions, https://www.spratings.com/scenario-builder-portlet/pdfs/ICSB_Ratings_Above_The_Sovereign.pdf [accessed: 19.04.2019].
Google Scholar

Standard & Poor’s (2019), How we rate Sovereigns, https://www.spratings.com/documents/20184/774196/How+We+Rate+Sovereigns+2019/a574456b-4ee9-2f51-0a95-21823713cf38 [accessed: 6.05.2019].
Google Scholar

Yildiz Ü., Günsoy B. (2017), Macroeconomics Determinants of Sovereign Credit Ratings: Panel Data Analysis, “International Journal of Business and Social Science”, vol. 8, no. 11, pp. 118–125.
Google Scholar

Downloads

Published

2021-07-08

How to Cite

Niedziółka, P. (2021). The Country Ceiling and Sovereign Rating Relationship Exemplified by the Case of Poland. Acta Universitatis Lodziensis. Folia Oeconomica, 3(354), 4-19. https://doi.org/10.18778/0208-6018.354.01

Issue

Section

Articles