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Default, Currency Crises and Sovereign Credit Ratings

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  • Carmen M. Reinhart

Abstract

Sovereign credit ratings play an important role in determining the terms and the extent to which countries have access to international capital markets. In principle, there is no reason why changes in sovereign credit ratings should be expected to systematically predict a currency crisis. In practice, however, in developing countries there is a strong link between currency crises and default. About 85 percent of all the defaults in the sample are linked with currency crises. The results presented here suggest that sovereign credit ratings systematically fail to anticipate currency crises--but do considerably better predicting defaults. Downgrades usually follow the currency crisis--possibly highlighting how currency instability increases default risk.

Suggested Citation

  • Carmen M. Reinhart, 2002. "Default, Currency Crises and Sovereign Credit Ratings," NBER Working Papers 8738, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8738
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    References listed on IDEAS

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    1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    2. Richard Cantor & Frank Packer, 1996. "Sovereign risk assessment and agency credit ratings," European Financial Management, European Financial Management Association, vol. 2(2), pages 247-256.
    3. Morris Goldstein & Graciela Kaminsky & Carmen Reinhart, 2017. "Methodology and Empirical Results," World Scientific Book Chapters,in: TRADE CURRENCIES AND FINANCE, chapter 11, pages 397-436 World Scientific Publishing Co. Pte. Ltd..
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
    6. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    7. Carmen M. Reinhart, 2002. "An Introduction," World Bank Economic Review, World Bank Group, vol. 16(2), pages 149-150, August.
    8. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
    9. Lee, Suk Hun, 1993. "Are the credit ratings assigned by bankers based on the willingness of LDC borrowers to repay?," Journal of Development Economics, Elsevier, vol. 40(2), pages 349-359, April.
    10. Goldfajn, Ilan & Valdes, Rodrigo O., 1998. "Are currency crises predictable?," European Economic Review, Elsevier, vol. 42(3-5), pages 873-885, May.
    11. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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