Case study: DBRS sovereign rating of Portugal: analysis of rating methodology and rating decisions

This paper examines the DBRS sovereign credit rating methodology and its rating decisions on Portugal. The paper identifies country-specific risk factors and technical specifications that justify the agency’s issuance of Portugal’s investment-grade notation throughout the sovereign debt crisis - which preserved Portugal’s access to the ECB bond purchase program. Both qualitative and empirical findings show that DBRS had a comparably lenient rating approach to Portugal within the DBRS cross-country rating decisions as well as in comparison to other rating agencies. A rating scale shows that DBRS subjectively inflated its objective (fundamental) rating decisions of Portugal on average by one rating notch. In addition, a replication of the DBRS sovereign risk model of Portugal identifies the “political commitment to fiscal consolidation” as the striking qualitative justification for the ongoing issuance of the investment-grade notation. While past literature on sovereign ratings is mostly limited to the analysis of S&P, Moody’s and Fitch Ratings, the inclusion of DBRS rating decisions – applied at the case of Portugal – allows to undertake a more comprehensive analysis of sovereign credit ratings. Our results further provide a better understanding of the DBRS (future) rating decisions on Portugal.

Click here to go to the paper by Annika Luisa Hofmann, Miguel Ferreira and João Lampreia.