Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?

18 Pages Posted: 9 Mar 2011

See all articles by Laura Jaramillo

Laura Jaramillo

International Monetary Fund (IMF)

Michelle Tejada

affiliation not provided to SSRN

Date Written: March 2011

Abstract

Sovereign investment grade status is often associated with lower spreads in international markets. Using a panel framework for 35 emerging markets between 1997 and 2008 this paper finds that investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals. This compares to a 5-10 percent reduction in spreads following upgrades within the investment grade asset class, and no impact for movements within the speculative grade asset class, ceteris paribus. While global financial conditions play a central role in determining spreads, market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates.

Keywords: Credit risk, Economic models, Emerging markets, Investment, Sovereign debt, Time series

Suggested Citation

Jaramillo, Laura and Tejada, Michelle, Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter? (March 2011). IMF Working Paper No. 11/44, Available at SSRN: https://ssrn.com/abstract=1780802

Laura Jaramillo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Michelle Tejada

affiliation not provided to SSRN

No Address Available

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