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

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  • Manfred Gärtner

    ()

  • Björn Griesbach

    ()

  • Florian Jung

    ()

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 equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards default. Copyright International Atlantic Economic Society 2011

Suggested Citation

  • Manfred Gärtner & Björn Griesbach & Florian Jung, 2011. "PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(3), pages 288-299, August.
  • Handle: RePEc:kap:iaecre:v:17:y:2011:i:3:p:288-299:10.1007/s11294-011-9302-7
    DOI: 10.1007/s11294-011-9302-7
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    References listed on IDEAS

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    Keywords

    Rating agencies; Sovereign debt; Credit risk; Eurozone; Panel data; Debt crisis; G24; H63; F34;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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