Research On Sovereign Credit Rating Index System Based On Countercyclical Characteristics

Sovereign credit rating is the credit rating agency's comprehensive evaluation of a government's willingness and ability to repay its debt and use the corresponding level symbol to represent the rating results. Existing international sovereign credit rating system is blamed for the evidently procyclical characteristics. There is a phenomenon of overestimate rating before a crisis and underestimating the rating after the crisis. It led further expansion to the crisis. During southeast Asia financial crisis in 1997 and the European debt crisis in 2010 three major rating agencies'procyclical phenomenon is particularly serious and slow down the global economic recovery.This paper first describes the theoretical basis of the credit rating, then explains the history and current situation of sovereign credit ratings. It exists a lack of indicators, repeat indicators, the lack of dynamic analysis and other defects. We will improve it from removing duplicate indicators, comprehensive, hierarchical and dynamic analysis of principles. According to the principle of comprehensiveness, sovereign whether has default record is important basis of their credit rating, so we choose default history as an indicator variable; according to scientific principles, adding more variables cause multicollinearity problems, so we choose appropriate 8-9 variables; according to the principle of hierarchy, we select the per capita income, real GDP growth to reflect the comprehensive strength of a country's institutions, and select government debt, fiscal balances, short-term debt to reflect the sovereign government's fiscal situation. By constructing a new index system which seeks to avoid and mitigate procyclical harm, this paper uses 2005-2012 economic data of 90 sovereign countries to conduct panel random effects and threshold effects regression, and estimates the determinants of sovereign credit rating. By employing 6 countries data from different levels of income before and after European debt crisis, analog rating fluctuates significantly less than the actual rating, the analog rating is below the actual ratings before the crisis, on the crisis broke time node, the analog rating also declined but significantly higher than the actual rating.The result of simulation shows that new index system proves to be more countercyclical. In conclusion, the agencies should pay attention to the index system hierarchy construction, evaluate credit rating conditions comprehensively, compromise between long-term and short-term, abandon discriminatory practices, improve the rating transparency and strengthen the regulation rating.