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What “hides” behind sovereign debt ratings?

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Author Info
António Afonso () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Pedro Gomes () (London School of Economics & Political Science; STICERD – Suntory and Toyota International Centres for Economics and Related Disciplines, Houghton Street, London WC2A 2AE, United Kingdom.)
Philipp Rother () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

In this paper we study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. We employ panel estimation and random effects ordered probit approaches to assess the explanatory power of several macroeconomic and public governance variables. Our results point to a good performance of the estimated models, across agencies and across the time dimension, as well as a good overall prediction power. Relevant explanatory variables for a country's credit rating are: GDP per capita, GDP growth, government debt, government effectiveness indicators, external debt, external reserves, and default history. JEL Classification: C23, C25, E44, F30, F34, G15, H63.

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Paper provided by European Central Bank in its series Working Paper Series with number 711.

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Length: 65 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070711

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Related research
Keywords: Credit ratings; sovereign debt; rating agencies; panel data; random effects ordered probit.;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sophia Rabe-Hesketh & Andrew Pickles & Colin Taylor, 2000. "Generalized linear latent and mixed models," Stata Technical Bulletin, StataCorp LP, vol. 9(53). [Downloadable!]
  2. Alexander W. Butler & Larry Fauver, 2006. "Institutional Environment and Sovereign Credit Ratings," Financial Management, Financial Management Association, vol. 35(3), Autumn.
  3. Emawtee Bissoondoyal-Bheenick & Robert Brooks & Angela Y.N.Yip, 2005. "Determinants of Sovereign Ratings: A Comparison of Case-Based Reasoning and Ordered Probit Approaches," Monash Econometrics and Business Statistics Working Papers 9/05, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  4. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53. [Downloadable!]
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  5. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February. [Downloadable!] (restricted)
  6. Christian B. Mulder & Brieuc Montfort, 2000. "Using Credit Ratings for Capital Requirements on Lending to Emerging Market Economies - Possible Impact of a New Basel Accord," IMF Working Papers 00/69, International Monetary Fund.
  7. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July. [Downloadable!] (restricted)
  8. Dany Jaimovich & Ugo Panizza, 2006. "Public Debt around the World: A New Dataset of Central Government Debt," RES Working Papers 4461, Inter-American Development Bank, Research Department. [Downloadable!]
  9. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Blackwell Publishing, vol. 2(2), pages 273-93, July. [Downloadable!] (restricted)
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  10. António Afonso, 2002. "Understanding the Determinants of Government Debt Ratings: Evidence for the Two Leading Agencies," Working Papers 2002/02, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  11. Vassilis A. Hajivassiliou & Yannis M. Ioannides, 1995. "Unemployment and Liquidity Constraints," Cowles Foundation Discussion Papers 1090, Cowles Foundation, Yale University. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. António Afonso & Christophe Rault, 2008. "What do we really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. António Afonso & Christophe Rault, 2007. "What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," Working Papers 2007/20, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  3. Ludger Schuknecht & Jürgen von Hagen & Guido Wolswijk, 2008. "Government risk premiums in the bond market. EMU and Canada," Working Paper Series 879, European Central Bank. [Downloadable!]
    Other versions:
  4. Eduardo Cavallo & Andrew Powell & Roberto Rigobon, 2008. "Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions," RES Working Papers 4601, Inter-American Development Bank, Research Department. [Downloadable!]
  5. Rasmus Rüffer & Marcelo Sánchez & Jian-Guang Shen, 2007. "Emerging Asia’s growth and integration - how autonomous are business cycles?," Working Paper Series 715, European Central Bank. [Downloadable!]
  6. Andrew Powell & Juan F. Martinez S., 2008. "On Emerging Economy Sovereign Spreads and Ratings," RES Working Papers 4565, Inter-American Development Bank, Research Department. [Downloadable!]
  7. Amine Mati & Emanuele Baldacci & Sanjeev Gupta, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund. [Downloadable!]
  8. António Afonso, 2007. "Public finances in Portugal: a brief longrun view," Working Papers 2007/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  9. Andrew Powell & Juan F. Martinez S., 2008. "Sobre los diferenciales y clasificaciones soberanos de economías emergentes," RES Working Papers 4566, Inter-American Development Bank, Research Department. [Downloadable!]
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