Sovereign Credit Rating: Modelling, Valuation and Professional Judgement

This paper draws on public documents and interviews to examine the valuation process used by credit rating agencies (CRAs) to construct sovereign credit ratings. It underscores the interaction of rating analysts’ professional judgement with sovereign rating methodologies to produce these ratings by focusing on three specific processes: converting uncertainty into calculable risk (encoding), constructing abstract categorization tables, and producing official ratings (commensuration). The paper shows that professional judgment is pervasive throughout these three valuation processes and that sovereign ratings are not the outcome of an individual decision-making process, but are constructed through the collective contribution of numerous professionals in CRAs. The paper also reflects on the dilemma faced by CRAs in wanting to jealously protect professional judgement while simultaneously avoiding creating an impression that the credit ratings they produce are subjective given the pressure from regulators and users to demonstrate that credit ratings are an objective product of robust statistical modelling.