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Doom-loops: The Role of Rating Agencies in the Euro Financial Crisis

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  • Heather D. Gibson
  • Stephen G. Hall

    ()

  • George S. Tavlas

    ()

Abstract

During the euro-area financial crisis, interactions between sovereign spreads and credit ratings appeared to have led to self-generating feedback loops. To examine the interaction between spreads and ratings, we estimate a simultaneous two-equation model in which spreads and ratings are endogenous. Using a panel of 5 euro-area countries, we construct time series comprising the ratings of its sovereigns determined by the three major rating agencies. We find that, controlling for the economic and political fundamentals, spreads and ratings strongly interacted with each other during the crisis, producing effects well-beyond those of the fundamentals, and with the interactions demonstrating high persistence.

Suggested Citation

  • Heather D. Gibson & Stephen G. Hall & George S. Tavlas, 2014. "Doom-loops: The Role of Rating Agencies in the Euro Financial Crisis," Discussion Papers in Economics 14/16, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:14/16
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp14-16.pdf
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    References listed on IDEAS

    as
    1. Mink, Mark & de Haan, Jakob, 2013. "Contagion during the Greek sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 102-113.
    2. Joshua Aizenman & Mahir Binici & Michael Hutchison, 2013. "Credit ratings and the pricing of sovereign debt during the euro crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 582-609, AUTUMN.
    3. Pisani-Ferry, Jean, 2013. "The known unknowns and unknown unknowns of European Monetary Union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 6-14.
    4. Theoharry Grammatikos & Robert Vermeulen, 2014. "The 2007--2009 financial crisis: changing market dynamics and the impact of credit supply and aggregate demand sensitivity," Applied Economics, Taylor & Francis Journals, vol. 46(8), pages 895-911, March.
    5. 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.
    6. Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2014. "Fundamentally Wrong: Market Pricing of Sovereigns and the Greek Financial Crisis," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 405-419.
    7. Annaert, Jan & De Ceuster, Marc & Van Roy, Patrick & Vespro, Cristina, 2013. "What determines Euro area bank CDS spreads?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 444-461.
    8. Arce, Oscar & Mayordomo, Sergio & Peña, Juan Ignacio, 2013. "Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 124-145.
    9. Manfred G?rtner & Bj?rn Griesbach, 2017. "Rating Agencies, Self-Fulfilling Prophecy and Multiple Equilibria? An Empirical Model of the European Sovereign Debt Crisis 2009-2011," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 199-226, June.
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    Cited by:

    1. Kenjegaliev, Amangeldi & Duygun, Meryem & Mamedshakhova, Djamila, 2016. "Do rating grades convey important information: German evidence?," Economic Modelling, Elsevier, vol. 53(C), pages 334-344.

    More about this item

    Keywords

    euro area financial crisis; sovereign spreads; rating agencies;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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