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PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

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  • Gärtner, Manfred

    ()

  • Griesbach, Bjoern

    ()

  • Jung, Florian

    ()

Abstract

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.

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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1106.

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Length: 22 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:06

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Keywords: Sovereign debt ratings; sovereign default; debt crisis; budget deficit; rating agencies; PIGS; risk premiums; government bond spreads.;

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References

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  1. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134 National Bureau of Economic Research, Inc.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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  4. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1383-1406, July.
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  6. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 33(4), pages 563-580, July.
  7. Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(4), pages 361-377.
  8. Roberto Perrelli & Christian B. Mulder, 2001. "Foreign Currency Credit Ratings for Emerging Market Economies," IMF Working Papers 01/191, International Monetary Fund.
  9. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
  10. Afonso, António & Gomes, Pedro & Rother, Philipp, 2007. "What “hides” behind sovereign debt ratings?," Working Paper Series, European Central Bank 0711, European Central Bank.
  11. António Afonso & Pedro Gomes & Philipp Rother, 2006. "Ordered Response Models for Sovereign Debt Ratings," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2006/34, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  12. Becker, William E. & Kennedy, Peter E., 1992. "A Graphical Exposition of the Ordered Probit," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 8(01), pages 127-131, March.
  13. Makram El-Shagi, 2010. "The role of rating agencies in financial crises: event studies from the Asian flu," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 34(4), pages 671-685.
  14. Sebastian Edwards, 2000. "Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies," NBER Books, National Bureau of Economic Research, Inc, number edwa00-1.
  15. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  16. Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, Elsevier, vol. 90(2), pages 156-162, February.
  17. Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(6), pages 917-946, October.
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Citations

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Cited by:
  1. Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance 48, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Dumitriu, Ramona & Stefanescu, Razvan, 2014. "Perspective ale ţintirii inflaţiei
    [Perspectives of the Inflation Targeting]
    ," MPRA Paper 52943, University Library of Munich, Germany, revised 14 Jan 2014.
  3. Dominique Guegan & Bertrand K. Hassani & Xin Zhao, 2013. "Emerging Countries Sovereign Rating Adjustment using Market Information: Impact on Financial Institution Investment Decisions," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13034, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Sylvester C.W. Eijffinger, 2012. "Rating Agencies: Role and Influence of Their Sovereign Credit Risk Assessment in the Eurozone," Journal of Common Market Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(6), pages 912-921, November.
  5. Gärtner, Manfred & Griesbach, Björn, 2012. "Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011," Economics Working Paper Series 1215, University of St. Gallen, School of Economics and Political Science.
  6. Kai Daniel Schmid & Michael Schmidt, 2012. "EMU and the Renaissance of Sovereign Credit Risk Perception," IAW Discussion Papers, Institut für Angewandte Wirtschaftsforschung (IAW) 87, Institut für Angewandte Wirtschaftsforschung (IAW).
  7. Gaertner, Manfred, 2014. "Standards are Poor: On Competence and Professional Integrity at the Leading Rating Agency," Economics Working Paper Series 1418, University of St. Gallen, School of Economics and Political Science.
  8. Gärtner, Manfred & Griesbach, Björn & Mennillo, Giulia, 2013. "The near-death experience of the Celtic Tiger: a model-driven narrative from the European sovereign debt crisis," Economics Working Paper Series 1321, University of St. Gallen, School of Economics and Political Science.
  9. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 160-185.
  10. Finn Marten Körner & Hans-Michael Trautwein, 2013. "Sovereign Credit Ratings and the Transnationalization of Finance - Evidence from a Gravity Model of Portfolio Investment," ZenTra Working Papers in Transnational Studies, ZenTra - Center for Transnational Studies 20 / 2013, ZenTra - Center for Transnational Studies, revised Feb 2014.
  11. Zeaiter, Hussein Zeaiter, 2013. "Sovereign Debt Defaults: Evidence using Extreme bounds Analysis," Working Papers 32/2013, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
  12. Richard J. Cebula, 2013. "Budget Deficits, Economic Freedom, and Economic Growth in OECD Nations: P2SLS Fixed-Effects Estimates, 2003–2008," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 28(Spring 20), pages 75-96.

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