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Pernicious effects: How the credit rating agencies disadvantage emerging markets

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  • Luitel, Prabesh
  • Vanpée, Rosanne
  • De Moor, Lieven

Abstract

This paper provides a synthesis of the literature on biases in sovereign credit ratings. Credit rating agencies favor their home countries and the homes of their major shareholders to the detriment of foreign countries. These home and foreign biases have multiple sources, each of which is especially at the disadvantage of emerging markets. While the characteristics of emerging debt markets make these countries particularly vulnerable to a downward bias in their sovereign credit rating, the consequences of a bad rating are especially severe here. A low credit rating increases borrowing costs, hampers access to international capital markets and inflates risk.

Suggested Citation

  • Luitel, Prabesh & Vanpée, Rosanne & De Moor, Lieven, 2016. "Pernicious effects: How the credit rating agencies disadvantage emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 286-298.
  • Handle: RePEc:eee:riibaf:v:38:y:2016:i:c:p:286-298
    DOI: 10.1016/j.ribaf.2016.04.009
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    1. repec:eee:jbfina:v:88:y:2018:i:c:p:366-392 is not listed on IDEAS

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    Keywords

    Credit ratings; Credit rating agencies; Emerging markets; International financial markets; Home bias;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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