PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies
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 equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.
|Date of creation:||Mar 2011|
|Contact details of provider:|| Postal: Dufourstrasse 50, CH - 9000 St.Gallen|
Phone: +41 71 224 23 25
Fax: +41 71 224 31 35
Web page: http://www.seps.unisg.ch/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Makram El-Shagi, 2010. "The role of rating agencies in financial crises: event studies from the Asian flu," Cambridge Journal of Economics, Oxford University Press, vol. 34(4), pages 671-685.
- Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
- Roberto Perrelli & Christian B. Mulder, 2001. "Foreign Currency Credit Ratings for Emerging Market Economies," IMF Working Papers 01/191, International Monetary Fund.
- Antonio Afonso & Pedro Gomes & Philipp Rother, 2009.
"Ordered response models for sovereign debt ratings,"
Applied Economics Letters,
Taylor & Francis Journals, vol. 16(8), pages 769-773.
- António Afonso & Pedro Gomes & Philipp Rother, 2006. "Ordered Response Models for Sovereign Debt Ratings," Working Papers Department of Economics 2006/34, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 361-377.
- James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 563-580, July.
- James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," Working Papers wp180, Political Economy Research Institute, University of Massachusetts at Amherst.
- James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
- Attinasi, Maria Grazia & Checherita-Westphal, Cristina & Nickel, Christiane, 2009. "What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09?," Working Paper Series 1131, European Central Bank.
- António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Afonso, António & Gomes, Pedro & Rother, Philipp, 2007. "What “hides” behind sovereign debt ratings?," Working Paper Series 711, European Central Bank.
- Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, vol. 90(2), pages 156-162, February.
- Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
- Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
- Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
- Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
- Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
- Steven B. Kamin & Karsten von Kleist, 1999. "The evolution and determinants of emerging market credit spreads in the 1990s," International Finance Discussion Papers 653, Board of Governors of the Federal Reserve System (U.S.).
- Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July.
- Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-293, July.
- Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
- Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134 National Bureau of Economic Research, Inc.
- 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.
- Becker, William E. & Kennedy, Peter E., 1992. "A Graphical Exposition of the Ordered Probit," Econometric Theory, Cambridge University Press, vol. 8(01), pages 127-131, March.
- 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.
- Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
- Steven B. Kamin & K von Kleist, 1999. "The evolution and determinants of emerging markets credit spreads in the 1990s," BIS Working Papers 68, Bank for International Settlements. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:usg:econwp:2011:06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Flockerzi)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.