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FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

A sovereign's rating is downgraded from Ba1 to B2 over a year, but the country's CDS spread had already widened sharply months earlier. A risk manager concludes the rating action is mainly an example of which feature of agency ratings?

The downgrade illustrates that agency ratings are through-the-cycle and adjust slowly, so they lag market signals such as CDS spreads. The market had already priced the deterioration before the committee acted, which is a common pattern in sovereign rating actions.

  1. AThrough-the-cycle orientation and slow adjustment, so ratings lag market signalsCorrect
  2. BPoint-in-time measurement that reacts immediately to market prices
  3. CDirect dependence on the country's equity market volatility
  4. DAutomatic downgrades triggered by CDS threshold levels

Explanation

Agencies aim for stable, through-the-cycle assessments and adjust after review, so downgrades often follow market-implied deterioration. The CDS widening came first, which is inconsistent with an immediate point-in-time rating. No automatic CDS trigger exists in agency methodology.

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