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Credit Ratings and Debt Crises

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  • Bussière, M.
  • Ristiniemi, A.

Abstract

This paper analyses the role of credit rating agencies in sovereign debt crises. Using a panel of 53 emerging and developing countries with annual data going back to 1977, the paper shows that credit ratings are not very good predictors of debt distress events once tested against a simple benchmark model with standard macroeconomic variables. Next, the paper turns to higher frequency data for a subset of countries to analyze the link between credit ratings and bond spreads. The results indicate that bond spreads react strongly to credit ratings, especially to downgrades in the non-investment grade category. The results are robust to a variety of additional tests.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 396.

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Length: 45 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:396

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Related research

Keywords: Credit rating agencies; debt crises; fiscal policy; emerging market economies; developing countries; panel estimation.;

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References

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  1. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  2. Sy, Amadou N.R., 2004. "Rating the rating agencies: Anticipating currency crises or debt crises?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2845-2867, November.
  3. Eduardo Borensztein & Patricio Valenzuela & Kevin Cowan, 2007. "Sovereign Ceilings "Lite"? the Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies," IMF Working Papers 07/75, International Monetary Fund.
  4. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-93, July.
  5. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.
  6. Martín González Rozada & Eduardo Levy Yeyati, 2006. "Global Factors and Emerging Market Spreads," Research Department Publications 4445, Inter-American Development Bank, Research Department.
  7. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany.
  8. Opp, Christian C. & Opp, Marcus M. & Harris, Milton, 2013. "Rating agencies in the face of regulation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 46-61.
  9. Bar-Isaac, Heski & Shapiro, Joel, 2010. "Ratings Quality over the Business Cycle," CEPR Discussion Papers 8156, C.E.P.R. Discussion Papers.
  10. Alsakka, Rasha & ap Gwilym, Owain, 2010. "Leads and lags in sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2614-2626, November.
  11. António Afonso, 2002. "Understanding the Determinants of Government Debt Ratings: Evidence for the Two Leading Agencies," Working Papers Department of Economics 2002/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  12. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  13. Aitor Erce, 2012. "Selective sovereign defaults," Globalization and Monetary Policy Institute Working Paper 127, Federal Reserve Bank of Dallas.
  14. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  15. Galina Hale, 2005. "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over," The Institute for International Integration Studies Discussion Paper Series iiisdp062, IIIS.
  16. Marc Flandreau & Norbert Gaillard & Frank Packer, 2010. "To err is human: rating agencies and the interwar foreign government debt crisis," BIS Working Papers 335, Bank for International Settlements.
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Cited by:
  1. Aitor Erce, 2012. "Does the IMF's official support affect sovereign bonds maturities?," Globalization and Monetary Policy Institute Working Paper 128, Federal Reserve Bank of Dallas.
  2. Holden, Steinar & Natvig, Gisle James & Vigier, Adrien, 2012. "An Equilibrium Model of Credit Rating Agencies," Memorandum 01/2013, Oslo University, Department of Economics.
  3. Aitor Erce, 2012. "Does the IMF´s official support affect sovereign bond maturities?," Banco de Espa�a Working Papers 1231, Banco de Espa�a.

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