Impact of COVID-19 government support measures on credit ratings revealed in new report

By R. Jason Howard, J.D.

The Board of the International Organization of Securities Commissions (IOSCO), has published a report relating to the impact of COVID-19-related government support measures (GSM), on the credit ratings and credit rating methodologies of Fitch, Moody´s and Standard & Poor´s, the three largest credit rating agencies (CRAs).

Report. IOSCO’s Financial Stability Engagement Group conducted the review and used "publicly available information gathered from the CRAs, as well on IOSCO member expertise and analysis," supplemented with roundtable discussions with industry participants and bilateral discussions with each CRA. The report addresses the observed impact of GSMs on credit ratings and credit ratings methodologies across four main asset categories—Sovereigns, Financial Institutions, Non-Financial Corporates, and Structured Finance—and considered the different types of GSMs and their impact on:

• Fiscal support measures, including tax measures, grants and subsidies, expansion of unemployment benefits, cash to household schemes, and loan programmes;
• Monetary support measures, including expanded Quantitative Easing programmes, reduction in key rates, and central bank liquidity facilities; and
• Financial support measures, including easing of regulatory requirements and payment holidays (e.g., on consumer credit products and mortgages).

GSMs, according to the review, played a "significant role in alleviating the downward pressure on credit ratings," but the long-term effectiveness remains uncertain as the timing and pace of GSM withdrawal, the roll-out and effectiveness of vaccination programmes, the potential for a resurgence of coronavirus cases, and the potential need for further government actions, all pose downside risks, especially in emerging markets.

The IOSCO media release notes that the report provides a summary of the GSMs observed impact during the pandemic and that "rating disclosures typically explain the impact of the GSMs where such impact was material to the rating decision," but no material changes to CRA methodologies were observed.

Conclusion. The report concludes that the effects of the GSMs across credit ratings and credit rating methodologies should continue to be considered and, with the COVID-19 health crisis continuing to unfold, the impact of GSMs on credit ratings should be regularly monitored.