16 December 2013

Fitch publishes report on approach to CRA III for sovereigns

The report, outlining its approach to the introduction of CRA III in respect of affected sovereign and sub-national issuers, sets out the implications of the regulation for EU-registered credit ratings agencies.

One of the key requirements is that CRAs must publish, from December 2013, an annual calendar setting out the dates for publication of sovereign and sub-national rating reviews for affected issuers for the forthcoming calendar year.

CRA III permits CRAs to deviate from the published calendar where it is necessary to comply with certain of their legal obligations under the EU Regulation for CRAs. The report sets out Fitch's interpretation of this provision as allowing us to publish a rating review - involving a change to the rating, Outlook or Rating Watch status - when there is a material change in the creditworthiness of the issuer that Fitch believes makes it inappropriate for it to wait until the next scheduled review date to update the rating or Outlook/Watch status.

Fitch envisages that such developments may include, but not be limited to:-

• Unforeseen political developments or data revisions - positive or negative - that generate either significant volatility or greater stability in domestic financial markets, with positive or negative implications for the macro-economic policy framework
• Rapid actual or expected change in public finances and/or debt sustainability, reflected in general government balance and general government debt ratios, which in our view is likely to lead to a material deterioration or improvement in sovereign debt servicing capacity
• Sudden deterioration or improvement in financing flexibility, which could be reflected either in limited or in uncertain access to public debt markets or an inability to reach agreement on external support with official sector lenders or, conversely, an unexpected resumption of market access or confirmation of official sector support
• Accelerated deterioration or improvement in external finances, which could be evidenced by, for example, declining or increasing international reserves or a depreciating or stabilising domestic currency

The report also contains a summary of the information required to be published when making any change to an existing rating or Outlook/Watch for an affected issuer. This information includes: measures of six specific quantitative data points; the relative weights of those data points in the rating decision; an indicator of default probability; an indicator of economic development (of the sovereign); any other relevant qualitative factors, including their weights in the rating decision; a detailed evaluation of the changes to the qualitative assumptions justifying the reasons for the rating change and their relative weight; a detailed description of the risks, limits and uncertainties related to the rating change; and a summary of the committee discussion.

Full press release

Full report (subscription required) 

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