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Sovereign ratings in the post-crisis world : an analysis of actual, shadow and relative risk ratings

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  • Basu, Kaushik
  • De, Supriyo
  • Ratha, Dilip
  • Timmer, Hans

Abstract

This paper analyzes the evolution of sovereign credit ratings in the wake of the global financial crisis by studying changes in actual, shadow, and relative ratings between 2008 and 2012. For countries that do not have a rating from the major rating agencies, shadow ratings are estimated as a function of macroeconomic, structural, and governance variables. The shadow rating exercise confirms earlier findings in the literature that even after the financial crisis, many unrated countries appear to be more creditworthy than previously believed and can access international capital markets. The paper also develops a new rating scale called the"relative risk rating,"which ranks countries according to their actual or shadow ratings after controlling for changes in the world weighted average rating. When relative ratings in 2012 are compared with the first half of 2008, the world average rating is found to be weaker because of the financial crisis. The relative rating improved in developing economies such as Azerbaijan, Ethiopia, Kazakhstan, Indonesia, and the Philippines, whereas it deteriorated in crisis-affected high-income countries such as Cyprus, Greece, Spain, Portugal, Ireland, and Egypt. Interestingly, India, Jordan, Poland, and the United Kingdom had their rating outlook downgraded by the rating agencies, but their relative rating actually improved as other countries suffered even worse downgrades. A regression model is used to analyze the relative contributions of different variables to rating changes during 2008-2012, a helpful feature for policy makers interested in improving sovereign ratings.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6641.

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Date of creation: 01 Oct 2013
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Handle: RePEc:wbk:wbrwps:6641

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Keywords: Debt Markets; Emerging Markets; Banks&Banking Reform; Economic Theory&Research; Currencies and Exchange Rates;

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  1. Alsakka, Rasha & ap Gwilym, Owain, 2012. "Rating agencies' credit signals: An analysis of sovereign watch and outlook," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 45-55.
  2. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
  3. David Hauner & Jiri Jonas & Manmohan Singh Kumar, 2010. "Sovereign Risk: Are the EU's New Member States Different?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(4), pages 411-427, 08.
  4. António Afonso & Davide Furceri & Pedro Gomes, 2011. "Sovereign credit ratings and financial markets linkages: application to European data," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2011/14, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Bo Becker & Todd Milbourn, 2010. "How did increased competition affect credit ratings?," NBER Working Papers 16404, National Bureau of Economic Research, Inc.
  6. International Monetary Fund, 2011. "Sovereign Credit Ratings and Spreads in Emerging Markets," IMF Working Papers 11/44, International Monetary Fund.
  7. Canuto, Otaviano & Mohapatra, Sanket & Dilip Ratha, 2011. "Shadow Sovereign Ratings," World Bank - Economic Premise, The World Bank, The World Bank, issue 63, pages 1-6, August.
  8. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
  9. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November.
  10. Antonio Afonso & Pedro Gomes & Philipp Rother, 2009. "Ordered response models for sovereign debt ratings," Applied Economics Letters, Taylor & Francis Journals, vol. 16(8), pages 769-773.
  11. Sen, Amartya K, 1977. "On Weights and Measures: Informational Constraints in Social Welfare Analysis," Econometrica, Econometric Society, Econometric Society, vol. 45(7), pages 1539-72, October.
  12. Ratha, Dilip & De, Prabal K. & Mohapatra, Sanket, 2011. "Shadow Sovereign Ratings for Unrated Developing Countries," World Development, Elsevier, vol. 39(3), pages 295-307, March.
  13. Kim, Suk-Joong & Wu, Eliza, 2008. "Sovereign credit ratings, capital flows and financial sector development in emerging markets," Emerging Markets Review, Elsevier, vol. 9(1), pages 17-39, March.
  14. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
  15. Prasanta K. Pattanaik & Yongsheng Xu, 2007. "Minimal relativism, dominance, and standard of living comparisons based on functionings," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 354-374, April.
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