Leading from Behind: Sovereign Credit Ratings during COVID-19 Pandemic

Using 311 sovereign rating actions by the three leading global rating agencies between January and August 2020, we show that severity of sovereign ratings actions is not affected by the intensity of the COVID-19 health crisis (proxied by case and mortality rates). We find that economic repercussions of the pandemic such as economic outlook of a country and governments’ response to the health crisis, and not the severity of the pandemic itself, determine the intensity of negative rating actions. Contrary to expectations, credit rating agencies pursued mostly a business-as-usual approach and reviewed sovereign ratings when they were due for regulatory purposes rather than in response to the rapid developments of the pandemic. Despite the disappointing reaction to the ongoing pandemic, sovereign rating news from S&P and Fitch still conveyed price-relevant information to the bond markets.