(Bloomberg) -- Ratings companies reacted slowly to the Covid-19 crisis, raising questions about the reliability of creditworthiness scores and their impact on financial stability, according to the first study into the effect of the pandemic on sovereign ratings.

The paper, to be published by the International Review of Financial Analysis, shows the largest three rating agencies (S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings) only reviewed sovereign scores when they were scheduled for regulatory purposes rather than as a fast response to the global spread of coronavirus. Regulations permit the companies to conduct reviews ahead of schedule when circumstances require.

The lack of fast movement on ratings “is very worrying because sovereign debt accounts for a large amount in investment portfolios and is clearly not being assessed in a timely manner,” said Patrycja Klusak, a lecturer in banking and finance at the University of East Anglia, one of the authors of the paper. “We still remember what happened during the 2007 global crisis when credit ratings agencies did not release up-to-date credit assessments.”

During the financial crisis, products with AAA ratings suffered significant losses that reverberated across the entire system. “When they get it wrong, the consequences can be severe,” the researchers said, pointing to the significant impact on the cost of public borrowing and the security of people’s pensions. 

Spokespeople for S&P, Fitch and Moody’s all declined to comment.

The academics considered 603 sovereign ratings actions by the Big Three between January 2020 and March 2021, and found they were slow to react to the pandemic compared to previous crises. S&P, for instance, downgraded about 16% of its sovereign portfolio in the six months following February 2020; that compared to downgrades for 25% of its sovereign portfolio in the six months following the collapse of Lehman Brothers in 2008, the research says.

Still, ratings news from S&P and Moody’s did appear to communicate price-relevant information to bond markets, the researchers said.

A separate report published in June from the Committee on Capital Markets Regulation -- an independent research organization -- found that credit rating agencies “performed their role well as independent providers of forward-looking information.”

Klusak worked with Moritz Kraemer, former head of sovereign ratings at S&P, alongside researchers from the University of Aberdeen, Goethe University in Frankfurt and the Ho Chi Minh City University of Technology in Vietnam.

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