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Rating the Rating Agencies

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  • Amadou N. R. Sy

Abstract

In contrast to the early-warning system literature, we find that currency and debt crises are not closely linked in emerging markets. We find that after 1994, credit ratings predict debt crises but fail to anticipate currency crises. When debt crises are defined as sovereign distress-when spreads are higher than 1,000 basis points-we find that countries experience reduced capital market access and high interest rates on their external debt for typically more than two quarters. We also find that lagged ratings and ratings changes, including negative outlooks and credit watches, anticipate such debt crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/122.

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Length: 25
Date of creation: 01 Jun 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/122

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Keywords: Bonds; currency crises; currency crisis; debt crises; bond; sovereign default; sovereign bond; sovereign external debt; bond spreads; debt events; international capital; sovereign defaults; international capital markets; debt crisis; bond markets; sovereign debt; market bond; bondholders; debt obligations; denominated access to international capital; bond defaults; financial markets; liquidity crises; debt service; financial institutions; sovereign bond markets; equity securities; private creditors; reserve bank; short-term debt; sovereign debt crises; foreign currency debt; nominal exchange rate; international financial markets; real exchange rate overvaluation; commercial creditors; risk-free interest rate; foreign debt; debt sustainability; bond issuers; bondholder; moral hazard; international finance; sovereign borrowers; emerging market bond; overvaluation; denominated bond; current account; bond market; financial system; exchange rate overvaluation; sovereign debt crisis; currency debt; debt dynamics; debt sustainability issues; sovereign bond market; debt default;

References

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  1. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
  2. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  3. 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.
  4. Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December.
  5. Ashok Vir Bhatia, 2002. "Sovereign Credit Ratings Methodology," IMF Working Papers 02/170, International Monetary Fund.
  6. 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.
  7. Merrick Jr., John J., 2001. "Crisis dynamics of implied default recovery ratios: Evidence from Russia and Argentina," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1921-1939, October.
  8. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers 01/2, International Monetary Fund.
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Citations

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Cited by:
  1. Tobias Knedlik & Gregor von Schweinitz, 2011. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," IWH Discussion Papers 12, Halle Institute for Economic Research.
  2. Andrew Berg & Rebecca N. Coke, 2004. "Autocorrelation-Corrected Standard Errors in Panel Probits," IMF Working Papers 04/39, International Monetary Fund.
  3. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
  4. Delatte, Anne-Laure & Gex, Mathieu & López-Villavicencio, Antonia, 2012. "Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 481-497.
  5. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.
  6. Gerardo Esquivel & Felipe Larraín, 2003. "¿Qué Sabemos Realmente sobre las Crisis Cambiarias?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 656-667.
  7. 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.
  8. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December.
  9. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems," IMF Working Papers 04/52, International Monetary Fund.
  10. Andrea Pescatori & Amadou N R Sy, 2007. "Are Debt Crises Adequately Defined?," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 306-337, June.
  11. Amadou N. R. Sy & Andrea Pescatori, 2004. "Debt Crises and the Development of International Capital Markets," IMF Working Papers 04/44, International Monetary Fund.
  12. Jose Noguera & Rowena A. Pecchenino, 2005. "Can a Cartel Fuel the Engine of Economic Development? OPEC and the macroeconomics of oil," CERGE-EI Working Papers wp280, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  13. Noguera, Jose & Pecchecnino, Rowena A., 2007. "OPEC and the international oil market: Can a cartel fuel the engine of economic development?," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 187-199, February.

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