Since the onset of the global financial crisis, Fitch,
Moodys and S&P have come under much scrutiny,
criticized for failing to assess the creditworthiness of
sovereigns, financial institutions and mortgage-backed
The rating agencies were then cast as the villains of the
eurozone crisis after relegating Portugal, Ireland and Greece
to junk status in 2010, triggering a pro-cyclical hike in
sovereign borrowing costs in the euro-area and a global market
As a result, US and European regulators, through the
European Securities and Markets Authority and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, have
taken draconian measures to boost ratings transparency and
diversify the playing field.
While new indices have been developed to provide alternative
views on bank-creditworthiness, the BlackRock sovereign risk
index (BSRI) offers an alternative benchmark for tracking
sovereign credit risk.
| Ewen Cameron Watt,
Since this index hails from the world's largest
investor with $3.8 trillion of assets under
management it's worth closer inspection.
The index, devised two and a half years ago, was created by
BlackRock because it viewed other market analysis, including
that by the ratings agencies, as being too simplistic, explains
Ewen Cameron Watt, chief investment strategist at
Rating agencies tend to lag behind the curve. In
practice, markets and credit default swaps changes long before
an agency change its sovereign outlook.
Gathered from publicly available financial data, the index
uses more than 30 quantitative measures, with qualitative
insight from third-parties to compliment the data. Indeed,
Moodys, Fitch and S&P are much more qualitative and
committee-based in their decision-making process, and are
sponsored by the sovereigns, whereas BlackRock
The index is made up of four main categories that count toward
a countrys score and ranking. Fiscal space, including
such metrics as debt-to-GDP and dependency ratios, accounts for
40%. Willingness to pay, which measures the governments
effectiveness and stability, accounts for 30%. External finance
position, or the countrys exposure to foreign currency
debt, is weighted at 20% and financial sector health accounts
The index covers 48 countries in the relative ranking.
A countrys ranking might improve either because
factors specific to the country have improved or because
factors specific to other countries have deteriorated,
BlackRock is wary about introducing more, smaller economies
on to the index. [Data derived] in smaller countries can
be of lower quality and this would affect the rating of all the
other countries because the results are all relative to one
another, says Watt.
The index influences portfolios depending on the needs and
mandates of BlackRocks clients, explains Watt, declining
to clarify further, and it is also a standalone product devised
to enhance BlackRock's proprietary research. When you are
paid by an investor to manage their money, acting on
third-party decisions is not good enough, he says.
In the most recent note, according to the index, the
external finance scores of most emerging markets, including
China, Thailand and Malaysia, are deteriorating,
while euro-pessimism might be on the wane as the BSRI scores of
Spain, Ireland and Austria have jumped due to improvements in
their fiscal space and external-finance scores.
In addition, the
deteriorating position of France is noted
in the index. We have noticed a gradually
deteriorating trend in our model for France over several
quarters, says Watt.
While Watt notes it is important not to paint all emerging
markets with the same brush, and that there is great
divergence between them, the fact the index uses the same
criteria to measure developed and emerging markets could cause
methodological problems, a challenge vexing all endeavours to
capture government creditworthiness.
Richard Segal, head of international credit strategy at
Jefferies, says: It is very difficult to create a
model which can accurately index a developed economy as well as
a developing economy. Although lots of risk models rely on
indicators such as debt/GDP, it is complicated to mix developed
and emerging economies here because GDP is often a proxy for
revenues and the revenue-to-GDP ratio is not stable across
And if you have both debt/GDP and debt/revenues as
variables, youre over-counting the importance of
Moreover, the weightings and the criteria used could be
subjective, creating bias results, says Segal. Not
everything needs to be included in the index, but most things
need to be considered," he says.
Nevertheless, while Moodys, Fitch and
S&P hold 95% of the markets share, there is
growing demand for different agencies to offer a variety of
products, notes Segal.
More importantly different indexes should be used to
compliment the work of the rating agencies, which are often
misused, he adds.