Are Sovereign Credit Ratings Overrated? (original) (raw)
Related papers
PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies
International Advances in Economic Research, 2011
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 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.
Differences of opinion in sovereign credit signals during the European crisis
The European Journal of Finance, 2016
Motivated by the European debt crisis and the new EU regulatory regime for the credit rating industry, we analyse differences of opinion in sovereign credit signals and their influence on European stock markets. Rating disagreements have a significant connection with subsequent negative credit actions by each agency. However, links among Moody's/Fitch actions and their rating disagreements with other agencies have weakened in the post-regulation period. We also find that only S&P's negative credit signals affect the own-country stock market and spill over to other European markets, but this is concentrated in the pre-regulation period. Stronger stock market reactions occur when S&P has already assigned a lower rating than Moody's/Fitch prior to taking a further negative action.
The Links between Sovereign Debt Spreads and Sovereign Rating Evaluations
2014
This article examines the effects over time of rating news on Eurozone sovereign debt securities and their spreads during the period January 2010 - June 2012. We found during this period that the three most important rating agencies announced 91 times rating changes or outlook revisions. We classified and analyzed the announcements by a temporal and geographical point of view. The German ten years Bond is our benchmark. We analyzed the spreads of ten European Counties part of Eurozone. Through the Pooled Least Squares method, we found how many basis points on average are moved by a rating announcement. We knew that sovereign rating downgrades have statistically and economically significant effects on the financial markets of sovereign bonds. We found that the spread of market influences the judgment of the rating agencies too, using e-views program. This news was not attended because it was considered that the rating agencies analyze the sovereign bonds through the analysis of count...
Understanding Sovereign Rating Movements in Euro Area Countries
PSN: Europe & Eurasia (Comparative) (Topic), 2017
This paper investigates the link between sovereign ratings and macroeconomic fundamentals for a group of euro area countries which recorded rating downgrades amid the euro area sovereign debt crisis. We apply an elaborated econometric estimation technique, based on a Bayesian ordered probit model, to understand how the decisions of rating agencies can be explained by economic developments. The estimated model re-produces historical ratings by using a small number of economic and institutional variables, which seem to effectively summarize the large number of criteria used by Moody JEL Classification: C25, G24, H63, H68
Ekonomický časopis, 2021
This paper investigates the impact of quantitative and qualitative factors on the long-term sovereign credit ratings of nine countries that joined the European Union in 2004 (Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia). Among this group, two subgroups are distinguished – euro area members and countries that pursue an independent monetary policy. The analysis is conducted for the period of 2004q1 – 2018q4, which is later divided into pre-crisis, crisis, and post-crisis sub-periods. Using a panel fixed effects model with robust standard errors, we find that the macroeconomic variables played the dominant role throughout the period under analysis, and particularly during the crisis. Moreover, the quality of governance had an important impact on the ratings in all three sub-periods. We also find that euro area membership has provided additional benefits in terms of countries’ perceived credibility.
Determinants and Impact of Sovereign Credit Ratings
The Journal of Fixed Income, 1996
n recent years, the demand for sovereign credit ratings-the risk assessments assigned by the credit rating agencies to the obligations of central governments-has increased dramatically. More governments with greater default risk and more companies domiciled in riskier host countries are borrowing in international bond markets. Although foreign government officials generally cooperate with the agencies, rating assignments that are lower than anticipated often prompt issuers to question the consistency and rationale of sovereign ratings. How clear are the criteria underlying sovereign ratings? Moreover, how much of an impact do ratings have on borrowing costs for sovereigns?
Credit Rating Agencies: the Importance of Fundamentals in the Assessment of Sovereign Ratings
The aim of this paper is to investigate the significance of a set of macroeconomic variables in the assessment of the sovereign ratings provided by the three main credit rating agencies in different periods in time and for countries belonging to different cate gorizations. Ratings have a great economic importance as they constitute the main drivers for attracting foreign investments and can influence the dynamics of interest rates. By grouping the countries according to levels of development and indebted ness, we provide the analysis of the weights attributed to each one of the macroeco-nomic indicators included in the analysis. Furthermore, it is of interest to examine how ratings are constructed and if they exhibit a historical coherence that goes be yond the economic cycles. The analysis rests on an unbalanced panel of 139 countries in the period 1975-2010. In order to provide an answer to ratings' historical coher-ence, we selected two sub-periods: 1975-1996 and from 1997 onwards. Static esti mates findings show that per capita GNI, inflation, unemployment, fiscal balance, government debt and default history significantly affect ratings, while GNI growth and current account balance are less relevant. Furthermore, Granger causality results underline that a one-way causality runs from average ratings to economic growth.
Stock Market Reactions To Sovereign Credit Rating Changes: Evidence From Four European Countries
Journal of Applied Business Research (JABR), 2014
We analyze the reactions of the returns of four European stock markets to sovereign credit rating changes by Fitch, Moody's, and Standard and Poor's (S&P) during the period from June 2008 to June 2012 using panel regression equations. We find that (i) upgrades and downgrades affect both own country returns and other countries' returns, (ii) market reactions to foreign downgrades are stronger during the sovereign debt crisis period, and (iii) negative news from rating agencies are more informative than positive news.