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PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

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Author Info

  • Manfred Gärtner

    ()

  • Björn Griesbach

    ()

  • Florian Jung

    ()

Abstract

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11294-011-9302-7
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Bibliographic Info

Article provided by Springer in its journal International Advances in Economic Research.

Volume (Year): 17 (2011)
Issue (Month): 3 (August)
Pages: 288-299

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Handle: RePEc:kap:iaecre:v:17:y:2011:i:3:p:288-299

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Web page: http://www.springerlink.com/link.asp?id=112112

Related research

Keywords: Rating agencies; Sovereign debt; Credit risk; Eurozone; Panel data; Debt crisis; G24; H63; F34;

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References

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  1. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
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  8. Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
  9. Sebastian Edwards, 2000. "Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies," NBER Books, National Bureau of Economic Research, Inc, number edwa00-1, April.
  10. Makram El-Shagi, 2010. "The role of rating agencies in financial crises: event studies from the Asian flu," Cambridge Journal of Economics, Oxford University Press, vol. 34(4), pages 671-685.
  11. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 191-240, 04.
  12. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  13. Roberto Perrelli & Christian B. Mulder, 2001. "Foreign Currency Credit Ratings for Emerging Market Economies," IMF Working Papers 01/191, International Monetary Fund.
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Citations

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Cited by:
  1. Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance 48, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Kai Daniel Schmid & Michael Schmidt, 2012. "EMU and the Renaissance of Sovereign Credit Risk Perception," IAW Discussion Papers 87, Institut für Angewandte Wirtschaftsforschung (IAW).
  3. Gärtner, Manfred & Griesbach, Björn, 2012. "Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011," Economics Working Paper Series 1215, University of St. Gallen, School of Economics and Political Science.

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