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Sovereign Ceilings "Lite"? T+L3712he Impact of Sovereign Ratingson Corporate Ratings in Emerging Market Economies

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  • Eduardo Borensztein
  • Patricio Valenzuela
  • Kevin Cowan

Abstract

Although credit rating agencies have gradually moved away from a policy of never rating a private borrower above the sovereign (the "sovereign ceiling") it appears that sovereign ratings remain a significant determinant of the credit rating assigned to corporations. We examine this link using data for advanced and emerging economies over the past decade and conclude that the sovereign ratings have a significant and robust effect on private ratings even after controlling for country specific macroeconomic conditions and firm-level performance indicators. This suggests that public debt management affects the private sector through a channel that had not been previously recognized.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/75.

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Length: 32
Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/75

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Keywords: Credit risk; Emerging markets; Public debt; credit rating; sovereign default; credit rating agencies; current account; external debt; private credit; working capital; sovereign debt; current account deficit; capital markets; private capital flows; capital controls; sovereign defaults; private debt; government debt; private capital; private debtors; current account balance; sovereign bond; capital flows; external obligations; external borrowing; currency debt; central bank; international capital markets; corporate bonds; capital market; current account deficits; foreign currency debt; foreign debt; private sector debt; domestic currency; international capital; sovereign bonds; debt restructuring; currency mismatches; reserve bank; capital market development; private sector borrowers; current account surplus; consumer price index; private sector borrowing; option pricing; international bonds; sovereign borrowers; public debt management; debt outstanding; brady bonds; corporate bond market; debt intolerance; equity prices; inflation rate; debt exchange; debt management; long-term debt;

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References

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  1. Martín González Rozada & Eduardo Levy Yeyati, 2006. "Global Factors and Emerging Market Spreads," Research Department Publications 4445, Inter-American Development Bank, Research Department.
  2. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
  3. Helmut Reisen, 2003. "Ratings Since the Asian Crisis," OECD Development Centre Working Papers 214, OECD Publishing.
  4. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, December.
  5. William F. Maloney & Jairo Nunez Mendez, 2003. "Measuring the Impact of Minimum Wages: Evidence from Latin America," NBER Working Papers 9800, National Bureau of Economic Research, Inc.
  6. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  7. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
  8. Eduardo R. Borensztein & R. Gaston Gelos, 2001. "A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds," CESifo Working Paper Series 564, CESifo Group Munich.
  9. Roberto Rigobon, 2002. "Contagion: How to Measure It?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 269-334 National Bureau of Economic Research, Inc.
  10. 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.
  11. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
  12. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
  13. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
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