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Sovereign credit ratings in Latin America and the Caribbean: history and impact on bond spreads

Author

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  • Bustillo, Inés
  • Perrotti, Daniel
  • Velloso, Helvia

Abstract

In this study, we examine the history of sovereign credit ratings in Latin America and the Caribbean, the evolution of credit quality, and the relationship between rating changes and the cost of accessing external financing as reflected in the behavior of sovereign bond spreads. We apply an event study to estimate the impact of credit rating changes on sovereign bond spreads in the past fifteen years. We find that the impact is asymmetric (with a larger impact for downgrades) and is sensitive to both spatial and temporal clustering. The results suggest that the quality of sovereign credit is important in determining the cost of access to private external financing.

Suggested Citation

  • Bustillo, Inés & Perrotti, Daniel & Velloso, Helvia, 2019. "Sovereign credit ratings in Latin America and the Caribbean: history and impact on bond spreads," LSE Research Online Documents on Economics 123197, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123197
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    File URL: http://eprints.lse.ac.uk/123197/
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    References listed on IDEAS

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    1. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
    2. Laura Jaramillo & Ms. Michelle Michelle Tejada, 2011. "Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?," IMF Working Papers 2011/044, International Monetary Fund.
    3. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    4. Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December.
    5. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
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    More about this item

    Keywords

    sovereign credit ratings; Latin America and the Caribbean; country risk spreads; asymmetric effect;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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