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Boom and Bust and Sovereign Ratings

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Author Info
Helmut Reisen
Julia von Maltzan ()

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Abstract

The 1990s have witnessed pronounced boom-bust cycles in emerging-markets lending, culminating in the Asian financial and currency crisis of 1997-98. By examining the links between sovereign credit ratings and dollar bond yield spreads over 1989-97, this paper aims at broad empirical content for judging whether the three leading rating agencies — Moody’s, Standard ' Poor’s and Fitch IBCA — can intensify or attenuate boom-bust cycles in emerging-market lending. First, an event study exploring the market response for 30 trading days before and after rating announcements finds a significant impact of imminent upgrades and implemented downgrades for a combination of ratings by the three leading agencies, despite strong anticipation of rating events. Second, a Granger causality test, by correcting for joint determinants of ratings and yield spreads, finds that changes in sovereign ratings are mutually interdependent with changes in bond yields. These findings are based on many more ...


Les années 90 ont été marquées par une succession de cycles d’expansion-contraction de grande ampleur dans les opérations de prêts destinés aux marchés émergents. Cette volatilité a culminé avec la crise monétaire et financière qui a atteint l’Asie en 1997-98. La relation entre les notations de crédit souverain et les écarts de rendement des obligations en dollar sur la période 1989-97 est examinée dans ce document. Sur la base de ces données empiriques, les auteurs visent à évaluer si les trois principales agences de notation — Moody’s, Standard ' Poor’s et Fitch IBCA — amplifient ou atténuent les cycles d’expansion-contraction des opérations de prêt sur les marchés émergents. En premier lieu, la réponse du marché avant et après la diffusion des notations est étudiée sur 30 jours ouvrables. Il en ressort que, en dépit d’une anticipation élevée des annonces, l’impact des hausses pressenties et des notations à la baisse est important, pour une combinaison des cotes des trois agences ...

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Paper provided by OECD Development Centre in its series OECD Development Centre Working Papers with number 148.

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Date of creation: Mar 1999
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Handle: RePEc:oec:devaaa:148-en

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Keywords: currency crisis credit rating sovereign risk emerging markets

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
G2 - Financial Economics - - Financial Institutions and Services

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  1. Roman Kraeussl, 2003. "A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II," CFS Working Paper Series 2003/23, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. Kaminsky, Graciela & Schmukler, Sergio, 2001. "Emerging markets instability: do sovereign ratings affect country risk and stock returns?," Policy Research Working Paper Series 2678, The World Bank. [Downloadable!]
    Other versions:
  3. Peter Nunnenkamp, 2001. "Too Much, Too Little, or Too Volatile? International Capital Flows to Developing Countries in the 1990s," Kiel Working Papers 1036, Kiel Institute for the World Economy. [Downloadable!]
  4. Roman Kraeussl, 2003. "Do Credit Rating Agencies Add to the Dynamics of Emerging Market Crises?," CFS Working Paper Series 2003/18, Center for Financial Studies. [Downloadable!]
    Other versions:
  5. Kevin Cowan & Patricio Valenzuela & Eduardo Borensztein, 2007. "Sovereign Ceilings "Lite"? the Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies," IMF Working Papers 07/75, International Monetary Fund. [Downloadable!]
  6. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research. [Downloadable!]
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  7. Daniel Cohen & Pierre Jacquet & Helmut Reisen, 2007. "Loans or Grants?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 764-782, December. [Downloadable!] (restricted)
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  8. 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!]
  9. Roman Kraussl, 2000. "Sovereign Credit Ratings And Their Impact On Recent Financial Crises," Departmental Working Papers 135, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  10. Martín Grandes, 2007. "The Determinants of Sovereign Bond Spreads: Theory and Facts From Latin America," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 151-181. [Downloadable!]
  11. Ashok Vir Bhatia, 2002. "Sovereign Credit Ratings Methodology: An Evaluation," IMF Working Papers 02/170, International Monetary Fund. [Downloadable!]
  12. António Afonso & Pedro Gomes & Philipp Rother, 2007. "What “hides” behind sovereign debt ratings?," Working Paper Series 711, European Central Bank. [Downloadable!]
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  13. Roman Kraeussl, 2000. "Sovereign Ratings and Their Impact on Recent Financial Crises," Working Papers 0002, University of Crete, Department of Economics. [Downloadable!]
  14. Rosemarie Bröker Bone, 2005. "A Importância Dos Fundamentos Nos Ratings Soberanos Brasileiros, 1994-2002," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 037, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  15. Julio Nogués & Martín Grandes, 2001. "COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 125-162, May. [Downloadable!]
  16. Farhan Hameed, 2005. "Fiscal Transparency and Economic Outcomes," IMF Working Papers 05/225, International Monetary Fund. [Downloadable!]
  17. Roman Kraeussl, 2003. "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," CFS Working Paper Series 2003/22, Center for Financial Studies. [Downloadable!]
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  18. Tobias Knedlik & Johannes Stöbel, 2006. "The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II," IWH Discussion Papers 21-06, Halle Institute for Economic Research. [Downloadable!]
  19. Galati, Davide & Sitzia, Bruno, 2000. "Sovereign bond ratings and market spreads. a dynamic panel analysis," MPRA Paper 8984, University Library of Munich, Germany. [Downloadable!]
  20. John Ammer & Nathanael Clinton, 2004. "Good news is no news? The impact of credit rating changes on the pricing of asset-backed securities," International Finance Discussion Papers 809, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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