Romanian authorities are performing a balancing act to prevent Romania's rating from falling into the “junk” (“speculative investments”) category, which would hinder the country's access to financing markets and lead to increased borrowing costs. If Romania borrows at a higher cost, Romanian companies will do the same, according to Cristian Bichi, adviser to the BNR governor, in a new analysis.
In general, due to the many technical aspects involved, the subject of credit ratings remains a mystery to the general public and, in some cases, even to economic analysts. Starting from this reality, the present opinion, developed for financial education purposes, will be structured as follows: in the first part, general aspects of the rating activity will be briefly presented, in order to provide readers with the necessary knowledge for a good understanding of the subject under discussion and the case study that will follow; in the second part, I will concretely show some of the most common mistakes that occur in relation to credit ratings in articles/studies with an economic subject.
What are rating agencies?
A rating agency is an independent legal entity whose activity includes the professional granting of credit ratings. Ratings are prospective assessments of the credit risk of issuers or financial obligations. Credit risk represents the risk that an issuer will be unable to ensure the payment of interest and/or principal on a debt instrument.
The primary reason for the existence of rating agencies is to reduce information asymmetry between the issuer of a financial instrument and investors concerning their ability and willingness to make timely payments on their debts. The strength of specialized agencies lies in their ability to synthesize all available information about a debtor into a single rating, which is then communicated to investors. This is particularly beneficial because conducting their own credit risk assessment of issuers would be very costly for investors. The synthetic nature of credit ratings also has the advantage of allowing investors to easily make comparisons between different firms and countries.
Ratings are important not only for their informational content but also for their transactional value and their use for financial regulatory purposes. Regarding transactional value, ratings facilitate the creation and enforcement of legal rights. For example, a downgrade of an issuer's rating can result in the early repayment of a bond (by activating a contractual “trigger” clause). Concerning financial regulation, credit ratings are used to determine banks' capital requirements or to limit institutional investors' risk exposure (they are only permitted to invest in securities with ratings above a certain level).
The rating agency sector is highly concentrated, consisting of a few major global players (Standard & Poor’s – S&P, Moody’s, and Fitch Ratings), the so-called “Big Three,” and various smaller agencies (regional or strictly specialized).
The three global rating agencies use the “issuer-pays” business model, whereby issuers of debt instruments pay the agencies for credit risk assessments. The public and investors have free access to these ratings. Most rating agencies switched to this remuneration method in the 1970s, abandoning the “subscriber-pays” model, which involved interested parties investing in specific debt securities paying the agencies to obtain the ratings associated with those financial obligations.
Ce este și ce nu este un rating de credit?
According to the European legal provisions, a credit rating is an opinion, given on the basis of a well established and defined classification system of rating categories, as to the creditworthiness of an entity, a debt or financial obligation, a debt or preference security or other financial instrument or an issuer of such obligations[iii]. Rating agencies do not ex-ante assign an absolute probability of default to an issuer or bond; they make a relative ranking of the creditworthiness[iv] of the issuer or bond by means of rating scales from strongest to weakest. The category of issuers includes commercial firms, financial institutions (e.g. credit institutions, finance companies, insurance companies), local authorities, public institutions, sovereigns. Bond ratings cover certificates of deposit, treasury notes, bonds, bank loans and certain hybrid securities (e.g. preferred shares). Note that the agencies also provide ratings for securitization vehicles.
Credit ratings can be classified into different categories based on: (1) the time horizon (short-term versus long-term); (2) the reference currency (foreign currency versus national currency); (3) the object of the rating (the issuer or one of its debt issuances). In the case of this last category, the assessment of credit quality considers either the issuer's general creditworthiness (“issuer rating”) or an individual debt issuance (“issue rating”). On another classification level, credit ratings can be solicited or unsolicited by issuers. Unsolicited ratings are based on public information. National and international ratings can also be mentioned; for the latter, global scales for assessing payment obligations are used, which allows for comparisons of credit quality beyond national borders.
As specialized agencies point out, a credit rating is only a forward-looking opinion regarding the credit risk of an issuer/financial obligation and not an accounting certification or a guarantee of actual debt repayment. Furthermore, a rating does not constitute a recommendation to sell, buy, or hold securities in a portfolio, nor is it a judgment about the suitability of an investment for a specific investor.
Sovereign credit ratings
Sovereign credit ratings indicate both the capacity and willingness of governments undergoing assessment by specialized agencies to honor their financial obligations in full and on time to private commercial lenders. A sovereign rating, which is a form of “issuer rating,” does not pertain to obligations owed to other governments, supranational institutions (e.g., IMF, World Bank), or public sector enterprises/regional governments. Often, the assessment of a country's general government's capacity to make due payments can serve as a ceiling for other risk assessments within that country.
Let's also clarify that the sovereign rating for debts in domestic currency (“local” in agency jargon) can be slightly higher than that for debts of the same nature in foreign currency, as a state's creditworthiness can be supported by its domestic powers (it has taxing capacity, issues domestic currency, and exerts influence over the financial sector [v]).
Specialized agencies also issue “issuance ratings,” but these only pertain to a specific government debt commitment, such as a government bond. The rating of such an individual issuance may be higher or lower than the sovereign rating, depending on the characteristics of the debt instrument (seniority, collateral, various contractual provisions). A senior unsecured government bond receives a rating identical to the sovereign rating in the case of many credit ratings at the upper end of the rating scale. As credit quality declines significantly, these ratings may differ, reflecting the fact that, as a rule, states adopt a selective default strategy, choosing to honor their obligations only for certain categories of debt, whose issuers have greater bargaining power.
Rating scales
Rating agencies develop their own rating scales (ordinal scales), where they establish a hierarchy of issuers/issues based on their ability to repay debt. Depending on the criterion of the time horizon of credit risk assessments, agencies use a long-term scale, which applies to debt with a maturity of more than one year, and a short-term scale, in which case the maturity is less than one year.
Fitch and S&P have almost identical long-term rating scales in terms of alphanumeric structure, with credit ratings expressed in upper case letters, whereas Moody's uses upper and lower case letters for its ratings (see Annex for details). For Fitch and S&P, the credit rating evolves downwards from AAA (best) to AA to A to BBB to BBB and so on up to D (indicating default/payment default). With the exception of the first and last categories, all other categories are given a “+” or ‘-“ sign, indicating that the issuer is higher or lower within them. For example, the BBB category comprises the following rating bands: BBB+, BBB and BBB-. Moody's ratings go down from Aaa to Aa to A to A to Baa to Ba and continue down to C. With the exception of Aaa, Ca and C, all other categories are given a numerical coefficient of 1, 2 or 3 to rank the ratings within them. According to this convention, as an example, category Aa is structured into rating steps Aa1, Aa2, Aa3.
Ratings of BBB- or Baaa3 and above are considered, by market convention, to belong to the “investment grade” category, while ratings of BB+ or Ba1 and below are classified as “speculative investments” or “high yield.” The former category is also referred to as “non-investment grade“ or the derogatory term ”junk.“ The investment policies of many institutional investors take into account the distinction presented above, as they are required to invest only in assets rated as ”investment grade.“ The rating scales of the three major agencies are largely comparable; however, there is no full equivalence between ratings, so they cannot be used interchangeably.
Regarding short-term rating scales, it should be emphasized that they contain fewer notches and use different terminology from one agency to another. For reasons of limiting the scope of this text, we will confine ourselves to presenting the scale used by S&P: A-1+ (highest), A-1, A-2, A-3, B, C, R, SD (selective default), D.
Rating outlooks/watch placements
The actual ratings (especially long-term ones) from agencies are accompanied by “Outlooks” and “Credit Watches.”.
Outlooks (“Positive”, “Stable”, “Negative”, and, more rarely, “Developing”) represent opinions on the probable evolution of the rating in the following period, with the time horizon considered differing between agencies. Outlooks are used when the issuer/obligation risk has not evolved sufficiently to justify a rating change. A “Positive” or “Negative” outlook does not mean a rating change will necessarily occur. Also, a rating with a “Stable” outlook can be upgraded or downgraded without being preceded by an outlook change. When it is not possible to indicate the rating trend, with both positive and negative elements in balance, the outlook will be noted as “Developing”. According to agency specifications, certain rating categories (among those not recommended for investment) do not have associated outlooks, as the volatility of these ratings is very high and outlooks would have limited informational value.
“Credit watch” indicates that a rating may be changed in the short term. Depending on the trends on which it is based, watch can be Negative or Positive (when the direction of a potential rating action is clear) or, more rarely, “Developing” (when there is no clear direction).
Romania's country rating
Following the theoretical excursion above, let's decipher the latest credit rating assigned to Romania by the agency S&P on April 3, 2026. In its commentary on the rating action, the agency states, as a headline, the following: Romania ratings affirmed ‘BBB-/A-3’; Outlook negative.
We will recognize from the outset, from the reference to Romania, that we are dealing with a sovereign rating, an issuer rating, which shows the overall ability of our country to meet its financial obligations to private commercial creditors. Being familiar with the rating scales, we will identify BBB- as a long-term rating step, falling into the „recommended for investment” category. However, this position is the last step before moving to junk and the negative effects of such a development materialize[vi]. A reading of the agency's press release will reveal that the BBB- rating concerns both Romania's foreign currency and „local” currency (RON) bonds (the agency decided not to give a more favorable rating to the latter). The same rating has been given to the government's individual senior unsecured bonds. The indicated outlook is negative, which indicates the sense of a possible rating change (downgrade) within a time horizon of two years. I emphasize that this outlook does not mean that such an event will necessarily occur. According to S&P, the outlook could become „stable” if the external and fiscal deficits narrow substantially, supported by a pick-up in economic growth.
Rating A-3 represents a short-term rating. According to S&P, a debtor in this category has an adequate capacity to meet its financial obligations. However, adverse economic conditions or changing circumstances are more likely to affect the debtor's ability to pay.