Just one sovereign rated by S&P Global Ratings defaulted in 2018, marking a dramatic decrease from the high of six defaults among five sovereigns in 2017. The default of Barbados in June made 2018 the seventh straight year with at least one sovereign default--the second-longest streak on record.

Rating actions on sovereigns were more positive in 2018 than in 2017, with more upgrades than downgrades for the first time since 2010 and the lowest number of downgrades since 2007. Economic reasons triggered most upgrades, while downgrade causes were more diverse. Regional differences were evident: European sovereigns accounted for most of the upgrades for the year, as they did in 2017, while Latin America had half of the downgrades. The Middle East and Africa had three upgrades and no downgrades, in a reversal from 2017.

However, during the past 10 years, the average sovereign credit rating has fallen to 'BBB-' from 'BBB', and on a GDP-weighted basis, the average is now 'A', down from 'A+' at the end of 2008. The percentage of high-investment-grade ('AA' category and 'AAA') ratings is near its lowest on record, at 22% (last year was slightly lower). In addition, investment-grade ratings ('BBB-' or higher) make up just 55% of the total--an improvement from 2012 but lower than 62% in 2000. Correspondingly, 45% of ratings are speculative grade ('BB+' or lower), which is just slightly below the peak of 48% in 2017 but higher than 38% in 2000.

While credit quality has improved overall in the past two years, ratings have shown diverging trends, with an increase in ratings in the 'B' category and lower. At the start of 2019, the number of ratings in the 'B' category and below was 42, representing 32% of sovereign ratings; both figures are the highest on record. The distribution of outlooks further suggests that the current distribution of ratings in the lower categories will continue over at least the next 18 months, with potential for slight improvement.

Ratings Distribution

S&P Global Ratings maintained 130 sovereign ratings as of Jan. 1, 2019. This was one more than at the start of 2018, after new ratings were assigned to Benin and Uzbekistan and Barbados defaulted. At the end of 2018, 10 of the 129 ratings from the start of the year were lower, 14 were higher, and 105 were unchanged.

Sovereign rating distribution has been trending lower since the late 1980s, when countries with smaller and less diversified economies began to seek credit ratings. The percentage of speculative-grade ratings increased significantly to 37% in 1999 from 3% in 1990, mostly as a result of newly assigned speculative-grade ratings, as opposed to downgrades of formerly investment-grade sovereigns. Over this period, the number of speculative-grade ratings rose to 30 from one, while the number of investment-grade ratings increased to 52 from 30 (see chart 1). The number of rated sovereigns has grown as more governments access the international bond markets. S&P Global Ratings has rated 143 sovereigns with foreign currency ratings since 1975.

During 2000-2009, growth in speculative-grade ratings continued to outpace growth in investment-grade ratings. Speculative-grade ratings increased to 53 in 2009 from 33 in 2000, while investment-grade ratings grew to 70 from 54. In 2009, 43% of ratings were speculative grade. During 2010-2018, the number and percentage of speculative-grade ratings increased to 59 and 45%, respectively, while the same figures for investment-grade ratings declined to 71 and 55%. In 2018, two speculative-grade sovereigns, Russia and Cyprus, were upgraded to 'BBB-', the lowest investment-grade rating. No investment-grade ratings were lowered to speculative grade.

By 2011, the number of rated sovereigns stabilized at about 130. Five years earlier, there were 112 sovereign ratings. Another such increase is unlikely, given the relatively small and static number of nations in the world. For that reason, the profile of sovereign ratings will change almost exclusively with the movement of existing ratings.

As of year-end 2018, 16 local currency sovereign ratings were higher than the corresponding foreign currency credit ratings (see table 1), reflecting S&P Global Ratings' view that a sovereign has flexibility in servicing its local currency debt based on the unique powers it enjoys within its own borders, particularly in its control of domestic financial and monetary systems. This study focuses on foreign currency ratings unless otherwise noted.

Table 1

Regional Rating Distribution

S&P Global Ratings segments most of the sovereigns it rates into six regions: the Middle East and North Africa; sub-Saharan Africa; Latin America; Asia-Pacific; the eurozone; and Central and Eastern Europe and the Commonwealth of Independent States (CIS)--the former Soviet republics. We further designate 20 nations, which come from all of the categories except the eurozone, as emerging markets, and 15 rated sovereigns--including the U.S., the U.K., and Canada--are not designated in any of these categories.

Table 2

The Middle East and Africa (combining all sovereign ratings in the continent) and Latin America have added the most speculative-grade ratings over the past decade. While there are more speculative-grade ratings in Asia-Pacific and Europe, the increases in those regions haven't significantly affected the overall quality of sovereign ratings.

Most new sovereign ratings since 1998 have also come from the Middle East, Africa, and Latin America. The number of sovereign ratings in Central and Eastern Europe and the CIS has also increased substantially on a percentage basis, though there aren't as many of them. Asia-Pacific has added fewer ratings still, and the eurozone has retained its tally of 19 ratings since 1998. The overall effect has been a reduction in the general credit quality of sovereigns.

Middle East and Africa

The Middle East and Africa had two sovereign ratings in 1995 (see chart 3). The tally increased to eight ratings in 1998, four of which were investment grade. The number of ratings has increased steadily since then, and the portion that are speculative grade has stayed fairly consistent. At the end of 2018, there were 29 ratings in the region, 21 of which were speculative grade.

Latin America

Latin America had one rating--'AA'--in 1982, and there was only one speculative-grade rating, in either the 'BB' or 'B' category, from 1983-1991 (see chart 4). The number of Latin American sovereign ratings increased steadily from 1993-2001, with more than three-quarters speculative grade. Latin American sovereign ratings have tended to be fairly low. They've improved since 2003, but even at their best, they were just below 50% speculative grade in 2015. At the end of 2018, 56% (15) of Latin American foreign currency sovereign ratings were speculative grade, a decrease from 16 in 2017.

Asia-Pacific

S&P Global Ratings has assigned 18 of the 21 ratings it maintains on Asia-Pacific sovereigns since 1988, and most of these ratings are investment grade. The region had only investment-grade ratings until 1991 (see chart 5). Speculative-grade ratings became more prevalent and have averaged 44% of all ratings since 1999. There have also been at least six ratings in the 'AA' category or 'AAA' in the region since 2005. At the end of 2018, there were 21 rated Asia-Pacific sovereigns, 38% of which were speculative grade.

Central and Eastern Europe and the CIS

S&P Global Ratings assigned its first sovereign ratings in Central and Eastern Europe and the CIS in 1993 (see chart 6). At least a third of the sovereign ratings in this region have been speculative grade since then. The highest percentage of speculative-grade ratings was 67% in 1994, and the percentage has been at least 50% since 2010. At the end of 2018, 52% of ratings in the region were speculative grade, and 'B' category ratings were the most common. A year earlier, the largest speculative grade category was 'BB'. There were also two 'AA' category ratings in 2018.

Eurozone

Among our regional categories, the eurozone contains the fewest ratings, and the number has not changed since 1997 (see chart 7). Eurozone ratings are also the highest, with an average of just 6% of ratings in the speculative-grade category since 1997. In addition, more eurozone sovereign ratings are in the 'AA' category or 'AAA' than in other regions, despite the smaller number of ratings. The highest number of speculative-grade ratings in the region was three, from 2012-2016. The number declined by one in both 2017 and 2018, leaving just one speculative-grade rating in the eurozone, on Greece.

Emerging markets

After stabilizing at about 20 ratings in the late 1990s, the tally of emerging market ratings has remained fairly evenly split between investment grade and speculative grade (see chart 8). Emerging markets make up a fluid category that S&P Global Ratings modifies as economic conditions change. For instance, Venezuela was considered an emerging market in 2018 but is no longer.

The number and percentage of investment-grade ratings grew steadily from 2004-2014, falling back in 2015 and 2016 and settling at 13 investment-grade ratings at the end of 2018. There has not been a 'AAA' rating among the current ratings categorized in this group, although Venezuela was included in emerging markets last year and was rated 'AAA' up to 1982. 'BBB' category ratings have been the most numerous since 2008. Notably, the average credit quality of emerging markets didn't decline as a result of the financial crisis; rather, it dropped more recently with an increase in 'BB' ratings in 2015.

Rating Movement In 2018

Sovereign upgrades surpassed downgrades in 2018 for the first time in eight years and the second time in the past 11 (see chart 9). There were 14 upgrades and 10 downgrades in the year, in contrast with the 22 downgrades and 13 upgrades in 2017. Rating actions were more frequent among speculative-grade ratings, which accounted for 79% of the total in 2018 despite making up only 46% of all ratings at the start of the year. Among speculative-grade ratings, rating activity was almost evenly split, with nine upgrades and 10 downgrades. All five investment-grade rating changes were positive.

We track rating movement according to the number of ratings that changed in 2018, as opposed to the number of times a rating changed. For example, for the purposes of this study, a rating that was lowered twice in 2018 translates to one lower rating at the end of the year than at the beginning. Similarly, if we lowered a rating but later raised it to the former rating, the study wouldn't consider this a rating action, because there was no net rating change. In 2018, most rating movement was moderate--no more than two notches--and only two sovereign ratings had multiple one-notch changes.

Table 3 counts the magnitude of the sovereign rating changes in 2018. The largest rating action was a five-notch downgrade of Barbados, to 'SD' (selective default) from 'CCC+' on June 6. Nicaragua was downgraded by one notch twice, ending 2018 at 'B-', from 'B+' at the start of the year. Greece was upgraded on two occasions, finishing the year at 'B+' after starting 2018 at 'B-'. Argentina was downgraded by one notch in 2018, a year after being one of just two sovereigns to be upgraded by more than one notch in 2017.

Table 3

Economic reasons were the most common trigger of rating actions in 2018, spurring 10 one-notch upgrades and three downgrades (two of one notch and one of two notches). Debt structure and burden led to two downgrades and one upgrade. Political causes led to two downgrades. Financial causes were behind two upgrades and two downgrades. There was one upgrade for legal reasons. Finally, the one default is considered a downgrade.

Since 1975, 79% of sovereign rating actions have been one notch. The majority of all sovereign rating actions and one-notch rating actions have been upgrades (see chart 11). However, most rating actions of more than one notch have been downgrades, so the aggregate rating movement--as measured by the cumulative number of notches changed--has been decidedly negative.

In 2018, the average notch change was less positive than in 2017. The average upgrade was 1.07 notches, down from 1.15 notches in 2017, while the average downgrade was 1.22 notches, higher than 1.18 notches in 2017.

The largest rating change ever over one year was a series of four downgrades to the Republic of Korea (South Korea) in 1997, to 'B+' from 'AA-', a 10-notch drop overall. This was during the Asian financial crisis, and South Korea was one of the nations hardest hit. Since then, we've raised our rating on South Korea nine times, and it's now 'AA'.

S&P Global Ratings' credit ratings continue to serve as effective indicators of relative credit risk. This report uses the Gini coefficient as a measure of the relative representation of each rating category within the group of sovereigns that defaulted in 1975-2018. A Gini coefficient ranges from zero to 1, with higher values indicating a stronger relationship between lower rating categories and higher default rates. (For details on the Gini methodology, see Appendix 1.)

From 1975-2018, the one-, three-, five-, and 10-year average foreign currency Gini coefficients were 91%, 78%, 73%, and 72%, respectively (see charts 24-27). We used the number of sovereign ratings at the beginning of each year as the weights for the weighted averages. Moreover, we find that there is a strong negative correlation between higher ratings and default occurrence. In other words, sovereigns that have defaulted were generally rated at the lower end of our ratings spectrum prior to doing so.

Regional Rating Movement

Middle East and Africa

Middle East and Africa ratings trended strongly downward from 2012-2017 but reversed course in 2018 with three upgrades and one downgrade (see chart 12). In the previous six years, there were 36 downgrades and three upgrades. Rating activity shifted after the financial crisis: In the three years prior to the crisis, there were 12 upgrades and no downgrades, but since 2008, there have been 43 downgrades and 12 upgrades. Since 2008, the number of ratings in the region has increased steadily, and they've mostly been speculative grade. The combination of new speculative-grade ratings and downgrades has led to lower ratings in general.

Latin America

For six consecutive years, more sovereign ratings in Latin America have been lowered than raised (see chart 13). There were 40 downgrades and 13 upgrades from 2013-2018. The region entered the financial crisis on a streak of positive rating movement, which it was able to sustain through 2008. However, Latin America then had six downgrades in 2009. There was a quick reversal in 2010, with upgrades outnumbering downgrades six to two, and from 2010-2012, there were 20 upgrades and 10 downgrades.

Asia-Pacific

Since 1991, the Asia-Pacific region has generally had positive rating movement, though there have been a few exceptions (see chart 14). As would be expected, the Asian financial crisis resulted in more downgrades than upgrades. Afterward, sovereigns in the region had positive or even net rating movement every year from 1999-2007 except 2001. In 2011, we downgraded more Asia-Pacific sovereigns than we upgraded, but then, through 2016, there were at least as many upgrades as downgrades. In 2017 and 2018, there were two downgrades and one upgrade each year.

Central and Eastern Europe and the CIS

Central and Eastern Europe and the CIS had consistent positive rating movement from 2000-2007 but then a strong negative trend from 2008-2016 (see chart 15). The downward trend reversed in 2017 and 2018, with nine upgrades and one downgrade.

Eurozone

Eurozone sovereign ratings have moved positively in most years, with the major exception of the financial crisis and its aftermath. From 2009-2013, there were 36 downgrades and just five upgrades (see chart 16). From 2014-2018, the trend reversed, with 25 upgrades and three downgrades. Nevertheless, the region's average credit quality is considerably lower than it was prior to the financial crisis.

Emerging markets

Overall emerging market rating trends appear to match those of the Middle East and Africa, Latin America, and Central and Eastern Europe and the CIS, which contain more of the lower-rated emerging market sovereigns. Asia-Pacific has the largest number of emerging market sovereigns, but Asia-Pacific has fewer speculative-grade emerging market ratings than the three other regions mentioned. Asia-Pacific has not experienced the strong trend of downgrades since 2012 that occurred in other emerging markets.

Rating And Default Activity In 2018

Not surprisingly, rating movement generally occurs less frequently at higher ratings than at lower ratings. Thus, sovereigns with higher ratings tend to keep the same ratings longer than lower-rated sovereigns. This is usually the case at both short and longer time horizons.

From 1975-2018, on average, 96.6% of sovereigns rated 'AAA' at the beginning of the year were rated 'AAA' at the end of the year. This percentage fell to 90.1% after three years, 84.5% after five years, 73.8% after 10 years, and 68.6% after 15 years (see tables 4-8). Moreover, over 15 years, 28% (on average) of sovereigns rated 'AAA' at the beginning of the period were rated in the 'AA' category at the end. The tables below show that ratings are generally more stable when the time horizon is shorter and the rating is higher. Upgrades and downgrades are broadly balanced in the shorter time horizons, while upgrades are higher at longer time horizons for ratings in the 'BB' category or higher.

Table 4

Table 5

Table 6

Table 7

Table 8

Another gauge of ratings stability is the average time a sovereign spends at a particular rating. Table 9 shows the average number of years that the particular rating had been effective as of Dec. 31, 2018. 'AAA' ratings are much more stable than any other rating category. All rating categories display more stability than those below them, with the exception of 'BB' category ratings, which are slightly less stable than 'B' category ratings. In addition, the average time spent with a rating below 'B-' is less than one year.

Table 9

Sovereign foreign currency rating transitions

Large rating transitions are not common among sovereigns. The more pronounced, multinotch downgrades were on sovereigns that defaulted. For example, lowering a rating to 'SD' from 'B' within the calendar year constitutes a seven-notch downgrade. Outside of these, the majority of downgrades are by one or--much less often--two notches. Sovereign upgrades seldom exceed a notch over a calendar year.

Sovereign local currency rating transitions

As with foreign currency sovereign credit ratings, local currency ratings have generally been more stable at higher ratings than at lower ones.

Table 10

Table 11

Table 12

The average magnitude of local currency sovereign rating changes has remained close to one notch in recent years (see chart 19). The average number of notches of local currency downgrades increased to 1.22 in 2018 from 1.21 in 2017, while the average magnitude of local currency upgrades decreased to 1.08 in 2018 from 1.36 in 2017.

Sovereign defaults

Barbados was the only sovereign to default in 2018, on June 6. This followed six defaults, the most on record, in 2017. Last year was the seventh straight year with at least one default. The average number of defaults since 1999 is 1.65, and from 2010-2018, the average is 2.11. By both standards, the number of defaults in 2018 was below average.

Since S&P Global Ratings began rating sovereigns, 20 sovereigns have defaulted, with seven defaulting twice and three defaulting three times. Defaults of sovereign members of a monetary union are counted as foreign currency defaults because these members have no sovereign control over the common currency. In line with this reasoning, the local currency ratings on eurozone sovereigns converged with the (often lower) foreign currency ratings when they joined the eurozone.

Table 13

Table 14

During 1975-2018, no sovereign rated 'AAA' at the beginning of a month defaulted within the ensuing 180 months (15 years). Moreover, the cumulative default rates were generally higher at lower rating levels, as one would expect. For example, from 1975-2018, the five-year average cumulative default rate for sovereigns rated in the 'A' category was only about 1.7% (see table 15). By comparison, the five-year average cumulative default rate was 2.3% for sovereigns rated in the 'BBB' category, 4.5% in the 'BB' category, 14.8% in the 'B' category, and 55.7% in the 'CCC'/'CC' categories.

The 15-year cumulative default rate averaged 3.7% for sovereigns with investment-grade ratings and 25.1% for sovereigns with speculative-grade ratings. The same trends are generally true when calculating default rates disaggregated by rating category, meaning by modifier rather than by rating category. Apart from the 'A+' and 'A' rating levels, which include the defaults of Greece and Cyprus, the cumulative default rates for ratings with modifiers were higher at lower ratings. These statistics, which cover many years of monthly data, suggest that foreign currency ratings have been strong indicators of default probability and the imminence of default.

Table 15

Generally, the cumulative default rates by rating category have been higher for foreign currency sovereign credit ratings than for local currency sovereign credit ratings (see table 16). The discrepancy may be attributable to the smaller number of local currency ratings (the foreign currency series begins in 1975, and the local currency one begins in 1993. Local currency sovereign default rates could also be understated because it is hard to detect forced rollovers of domestic bank debt or coerced exchanges of local-law, local currency debt when domestic financial institutions hold the debt. But also, as our "Sovereign Rating Methodology" explains, we consider that--other things being equal--the probability of default on a sovereign's local currency obligation could be lower than on a foreign currency obligation.

Table 16

On average, there is a negative correlation between the initial rating on a sovereign and its time to default, if default occurs. For example, for the entire pool of sovereign defaults (1975-2018), the average times to default for issuers that were originally rated in the 'A' and 'BBB' categories were 18.47 years and 15.08 years, respectively, from the initial ratings, whereas issuers in the 'B' rating category had an average time to default of only 8.11 years. When an issuer emerges from a default (including selective default), we treat it as a new entity. Similarly, we consider the first rating we assign after the default event to be the original rating on this new entity.

Tables 18 and 19 display the median, average, and standard deviations for the time to default from the original rating for foreign currency and local currency ratings. Tables 20 and 21 present the average and median times to default from each rating category and include both rating originations and transitions to each category. In both cases, the standard deviation of the time to default shrinks progressively as the rating gets lower. Generally speaking, the average time to default for each rating category is longer when based on the initial rating on a sovereign than when based on later ratings.

Sovereigns that approach default usually experience multiple successive downgrades as the likelihood of default increases. Table 17 shows the last date of the highest rating, the number of intermediate rating actions (including outlook revisions) before default, and the date of the sovereign's default. Charts 20-25 depict the rating movements and show how defaulted sovereigns that were rated higher generally took longer to default than lower-rated sovereigns.

Table 17

Table 18

Table 19

Table 20

Table 21

Appendix 1: Gini Ratios

In addition to examining the absolute performance of ratings, we examine their relative performance. One technique we use to measure relative performance is the Gini coefficient. The Gini coefficient--a summary statistic of the Lorenz curve--is a measure of the relative ability of ratings to differentiate risk. We believe that comparing Lorenz curves and Gini coefficients is useful. Lorenz curves for foreign currency and local currency sovereign ratings resemble the ideal Lorenz curves, though the small sample size results in less accurate readings than in other sectors. A larger number of data points would register a smooth line that curves, as in chart 25. Many of the other charts show lines that take sharp turns, resulting in angles rather than curves.

Chart 24 shows the one-year Lorenz curve for sovereign foreign currency ratings. The points along the Lorenz curve represent different ratings, starting with bonds in the 'CCC' and lower categories on the far left. The first point indicates that the one-year transition to default was 46% at 'CCC' and lower ratings. As the ratings rise, the number of defaults decreases, yielding points that continue to climb through the remainder of the speculative-grade scale before turning sharply to the right upon reaching 100% at the 'BB-' rating. As investment-grade ratings continue to rise, the vertical distance representing defaults does not change, while the proportion of ratings in the universe increases dramatically. Because there are no defaults at any rating higher than 'BB-', the chart shows a strong relationship between speculative-grade ratings and defaults.

The Lorenz curve for sovereigns shows an extremely strong relationship between ratings at the beginning of a year and the default experience of the group of ratings. The left side of the Lorenz curve travels vertically toward 100% before slightly turning at 'CCC'/'C' at 46%, meaning that 46% of defaults within a one-year time horizon were for bonds that began the period in the 'CCC' rating category or lower. Meanwhile, 100% of defaults occurred among bonds rated 'BB+' or lower (speculative grade) at the start of the one-year period.

The table below further illustrates the information in the Lorenz graph. The lowest value in the left column shows the cumulative proportion of defaults at the 'CCC'/'C' category, or 46.07%, and the number to the right is the cumulative proportion of the rated universe--much lower, at 1.23%. This means that 46.07% of the defaults came from just 1.23% of the ratings, all of which were in the 'CCC' or lower category. Moving up the table, one can observe that once ratings reach 'B+', representing 19.62% of all ratings, 92.68% of defaults have occurred at 'B+' or lower ratings.

Table 22

The sovereign foreign currency Gini coefficients for the one-, three-, five-, and 10-year horizons are 91%, 78%, 73%, and 72%, respectively. The sovereign local currency Gini coefficients for the one-, three-, five-, and 10-year horizons are 83%, 70%, 65%, and 59%, respectively (see charts 28-31). This indicates that foreign currency Gini coefficients are better indicators of future defaults than local currency Gini coefficients.

Appendix 2: Methodology And Definitions

This study is based on long-term sovereign credit ratings. The methodology tracks rating migrations over time and includes revisions to 'SD' (selective default). An 'SD' rating is more common for sovereign issuers than a 'D' rating because defaulting sovereigns often continue to service some of their debt. This study is based on issuer ratings as opposed to issue ratings. In other words, we look at the sovereign ratings on the central governments themselves, not the ratings on the individual securities these governments might have issued.

Our metrics treat all issuers equally and are not adjusted for size or influence. Therefore, for the purposes of this study, a default by Argentina counts the same as a default by Mali, even though the latter has a much smaller economy. Our study tracks defaults on a sovereign's commercial debt, including both bonds and bank loans.

Withdrawn ratings (as indicated with the abbreviation "NR," which stands for "not rated") are included up until the date of withdrawal. We record defaults after the date of withdrawal if we obtain knowledge of those defaults. As of Dec. 31, 2018, S&P Global Ratings had withdrawn 12 public sovereign ratings, for Benin, Cambodia, Gabon, Grenada, Guernsey, Isle of Man, Kyrgyz Republic, Libya, Madagascar, Mali, Seychelles, and Tunisia. (We reinstated the rating on Benin in July 2018 and on Guernsey in October 2014.) There are a total of 171 rating records for sovereigns, including those of defaulted ratings.

S&P Global Ratings generally defines "default" as the failure to meet a principal or interest payment on the due date contained in the original terms of a debt issue (see "Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings," Oct. 24, 2013). However, questions can arise when applying this definition to sovereign obligations. We consider a sovereign to be in default under any of the following circumstances:

• For local currency and foreign currency bonds, notes, and bills issued by the central government and held outside the public sector of the country, a sovereign default occurs when the central government either fails to pay scheduled debt service on the due date or tenders an exchange offer of new debt with less favorable terms than the original issue.
• For private-sector bank loans incurred by the central government, a sovereign default occurs when the central government either fails to pay scheduled debt service on the due date or negotiates with the bank creditors a rescheduling of principal or interest at less favorable terms than in the original loan.

Emergence from default also can be a complicated analytical issue for sovereigns. Sovereigns often undertake debt restructurings through exchange offers that, we find, rarely close the books on the restructured debt. We have observed that for a number of reasons, from difficulty in contacting all debtholders to holdouts seeking payment in accordance with original terms, participation in sovereign distressed debt exchanges usually does not reach 100%. This stands in contrast with debt restructurings in the U.S. and in many other jurisdictions, where all obligations are typically addressed in bankruptcy reorganization. An entity reorganizing outside of bankruptcy generally must continue payments on the holdouts' debt or face the prospect of an involuntary bankruptcy filing.

Less common among sovereign defaults is the repudiation of debt, which most often follows a revolutionary change of regime (as occurred in Russia in 1917, China in 1949, and Cuba in 1960). S&P Global Ratings takes no position on the propriety of government debt defaults, repudiations, and the like. S&P Global Ratings also does not take a position on the course of negotiations (or the absence thereof) between creditors and the government about working out debt that is repudiated or on the parameters of any settlements between creditors and governments that could occur. Instead, our ratings are opinions on the probability of default on a forward-looking basis. We analyze historical defaults to form our own view about the extent to which they could affect the likelihood of the sovereign defaulting in the future.

In general, S&P Global Ratings' sovereign ratings apply only to debt that the present government acknowledges as its own. If there is no resolution of a default through the courts or by the parties involved, S&P Global Ratings eventually withdraws the defaulted ratings based on the diminished prospects for resolution and the lack of relevance of the defaulted ratings in the context of the market. For example, S&P Global Ratings has no rating on direct and guaranteed debt of the government of China issued prior to the founding of the People's Republic of China in 1949 because S&P Global Ratings first rated China in 1992, long after the new government repudiated pre-1949 debt. The default is included in this study, which covers defaults by rated and unrated issuers.

The data set includes sovereign ratings that were withdrawn following a default. In those cases, if the sovereign was rated again, a new record would have been established, and the new rating would not be connected to the defaulted rating. This creates more than one record for defaulted sovereigns. Therefore, there are 171 foreign currency records for 143 sovereigns that we have rated, since some of the ratings were reestablished following defaults.

Static pool methodology

S&P Global Fixed Income Research conducts its default studies on the basis of groupings called static pools. For the purposes of this study, we form static pools by grouping issuers by rating category at the beginning of each year, quarter, or month that the database covers. Each static pool is followed from that point forward. All issuers included in the study are assigned to one or more static pools. When an issuer defaults, we assign that default back to all of the static pools to which the issuer belonged.

We use the static pool methodology to avoid certain pitfalls in estimating default rates. This is to ensure that default rates account for rating migration and to allow for default rates to be calculated across multiperiod time horizons. Some methods for calculating default and rating transition rates might charge defaults against only the initial rating on the issuer, ignoring more recent rating changes that supply more current information. Other methods may calculate default rates using only the most recent year's default and rating data, which may yield comparatively low default rates during periods of high rating activity because they ignore prior years' default activity.

The pools are static in the sense that their membership remains constant over time. Each static pool can be interpreted as a buy-and-hold portfolio. Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of sovereigns in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different studies. Therefore, every new update revises results back to the same starting date of Dec. 31, 1975, so as to avoid continuity problems.

For instance, the 1976 static pool consists of all sovereigns rated as of 12:01 a.m. on Jan. 1, 1976. Adding those sovereigns first rated in 1976 to the surviving members of the 1976 static pool forms the 1977 static pool. All rating changes that took place are reflected in the newly formed 1977 static pool through the ratings on these entities as of 12:01 a.m. on Jan. 1, 1977. We used the same method to form static pools for 1978-2018.

Consider the following example for annual static pools: A sovereign is originally rated 'BB' in mid-1986 and is downgraded to 'B' in 1988. This is followed by a default in 1993. We would include this hypothetical issuer in the 1987 and 1988 pools with the 'BB' rating, which was the rating at the beginning of those years. Likewise, it would be included in the 1989-1993 pools with the 'B' rating. Yet each of the seven pools in which this sovereign was included (1987-1993) would record its 1993 default at the appropriate time horizon.

Default rate calculations

Cumulative default rates average the experience of all static pools in a select period by calculating marginal weighted-average default rates conditional on survival (survivors being nondefaulters) for each possible time horizon and accumulating marginal default rates. We calculate conditional-on-survival default rates by dividing the number of issuers in a static pool that default within a specific time horizon by the number of issuers that had survived (had not defaulted) up to that point in time. In the context of sovereign ratings, we treat the selective defaults of governments as complete defaults. We base weights on the number of issuers in each static pool and base these calculations on monthly start dates for 12-month increments.

Transition analysis

Transition rates compare issuer ratings at the beginning of a period with ratings at the end of the period. To compute one-year rating transition rates by rating category, we compared the rating on each entity at the end of a particular year with the rating at the beginning of the same year. An issuer that remained rated for more than one year was counted as many times as the number of years it was rated. For instance, an issuer continually rated from the middle of 1984 to the middle of 1991 would appear in the seven consecutive one-year transition matrices from 1985-1991. If the rating on the issuer was withdrawn in the middle of 1991, it would be included in the column representing transitions to "NR" in the 1991 transition matrix. Similarly, if it defaulted in the middle of 1991, it would be included in the column representing transitions to 'D' in the 1991 one-year transition matrix.

All 1975 static pool members still rated on Jan. 1, 2019, had 44 one-year transitions, while sovereigns first rated on Jan. 1, 2018, had only one. Table 25 displays the summary of one-year transitions in the investment-grade and speculative-grade rating categories. Each one-year transition matrix displays all rating movements between letter categories from the beginning of the year through year-end. For each rating listed in the matrix's leftmost column, there are nine ratios listed in the rows, corresponding to the ratings from 'AAA' to 'SD', plus an entry for "NR."

The only ratings considered in these calculations are those on entities at the beginning of each static pool and those at the end. All rating changes that occur in between are ignored. For example, if an entity was rated 'A' on Jan. 1, 2015, and was downgraded to 'BBB' in the middle of the year and then upgraded to 'A' later in the year (with no other subsequent rating changes), this entity would be included only in the percentage of issuers that began the year as 'A' that ended the year as 'A'. This also applies to transition matrices that span longer time horizons. If an issuer defaults, we consider the rating as of Dec. 31 of that particular year to be 'D'. Similarly, if we withdraw our rating on an issuer, we consider the issuer to be not rated as of Dec. 31 of that year.

Multiyear transitions.  Multiyear transitions were also calculated for periods of two to 15 years. In this case, we compared the rating at the beginning of the multiyear period with the rating at the end. For example, three-year transition matrices were the result of comparing ratings at the beginning of the years 1975-2016 with the ratings at the end of the years 1977-2018. Otherwise, the methodology was identical to that used for single-year transitions.

We calculated average transition matrices on the basis of the multiyear matrices described. These average matrices are a true summary, the ratios of which represent the historical incidence of the ratings listed in the first column changing to the ones listed in the top row over the course of the multiyear period. Transition matrices that present averages over multiple time horizons are also calculated as issuer-weighted averages.

For inclusion in the matrix, the issuer must be in at least one year. In the case of the three-year matrix, we must have rated the sovereign by Jan. 1, 2013; in the case of the 15-year matrix, we must have rated it by Jan. 1, 2001. Thus, there are progressively fewer observations the longer the transition period is, given the growth of sovereign ratings and, of course, given that there will be fewer static pools for each added set of 12 monthly cohorts in the matrix.

Rating modifiers

Our calculations of upgrade and downgrade percentages, as well as the magnitude of rating changes, consider the specific rating as opposed to the rating category. (For example, 'A-', 'A', and 'A+' are the ratings that fall within the 'A' rating category.) However, for practical reasons, some transition tables may use rating categories. Doing so means that actions such as a downgrade to 'AA-' from 'AA' or an upgrade to 'BBB+' from 'BBB-' are not considered to be transitions because the ratings remained within the same rating category.

Appendix 3: Additional Exhibits

Table 23

Table 24

Table 25  |  View Expanded Table

Table 26

Table 27

Table 28  |  View Expanded Table

Table 29

Table 30

Table 31

Table 32

Table 33

Table 34

Table 35

Table 36  |  View Expanded Table

Table 37

Table 38

Table 39

Table 40

Table 41

Table 42

Table 43  |  View Expanded Table

Table 44

Table 45

Table 46

Table 47  |  View Expanded Table

Table 48

Table 49

Table 50

Table 51

Table 52

Table 53

Table 54

Table 55

Table 56

Table 57

Related Criteria And Research

Related Criteria

• Sovereign Rating Methodology, Dec. 18, 2017

Related Research

• Middle East And North Africa Sovereign Rating Trends 2019, Jan. 15, 2019
• Americas Sovereign Rating Trends 2019, Jan. 14, 2019
• Asia-Pacific Sovereign Rating Trends 2019, Jan. 14, 2019
• Central And Eastern Europe And CIS Sovereign Rating Trends 2019, Jan. 14, 2019
• Emerging Markets Sovereign Rating Trends 2019, Jan. 14, 2019
• Eurozone Sovereign Rating Trends 2019, Jan. 14, 2019
• Global Sovereign Rating Trends 2019, Jan. 14, 2019
• Sub-Saharan Africa Sovereign Rating Trends 2019, Jan. 14, 2019