Case Study: DBRS Sovereign Rating of Portugal. Analysis of Rating Methodology and Rating Decisions

February 26, 2018

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.