Pigs or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies
University of St. Gallen - SEPS: Economics and Political Sciences
University of St. Gallen
affiliation not provided to SSRN
April 20, 2011
U. of St. Gallen Law & Economics Working Paper No. 2011-06
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.
Number of Pages in PDF File: 23
Keywords: Sovereign debt ratings, sovereign default, debt crisis, budget deficit, rating agencies, PIGS, risk premiums, government bond spreads
JEL Classification: G24, H63, F34working papers series
Date posted: April 21, 2011
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