Credit Ratings and Debt Crises
45 Pages Posted: 11 Sep 2012
Date Written: September 1, 2012
This paper analyses the role of credit rating agencies in sovereign debt crises. Using a panel of 53 emerging and developing countries with annual data going back to 1977, the paper shows that credit ratings are not very good predictors of debt distress events once tested against a simple benchmark model with standard macroeconomic variables. Next, the paper turns to higher frequency data for a subset of countries to analyze the link between credit ratings and bond spreads. The results indicate that bond spreads react strongly to credit ratings, especially to downgrades in the non-investment grade category. The results are robust to a variety of additional tests.
Keywords: Credit rating agencies, debt crises, fiscal policy, emerging market economies, developing countries, panel estimation
JEL Classification: E60, C33, C35
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