Credit Rating Agencies in Emerging Democracies: Guardians of Fiscal Discipline?

13 Pages Posted: 20 Apr 2016

See all articles by Marek Hanusch

Marek Hanusch

University of Oxford

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Date Written: March 1, 2013

Abstract

Credit rating agencies have drawn criticism for failing to anticipate and deter root causes of the 2008-2009 financial crisis in the United States. However, this paper presents evidence that credit rating agencies regularly anticipate and deter governments in emerging democracies from opportunistic borrowing and potential financial crises related to elections and the political budget cycle behavior they encourage. The paper considers a sample of 18 such countries holding 32 presidential elections from 1989 to 2004. The analysis shows that credit rating agencies induced greater fiscal discipline during election periods when governments had incentives to borrow opportunistically for short-term electoral gain. Countries with higher credit rating agency sovereign ratings borrowed less than lower-rated countries in election periods, but borrowed more in non-election periods. Credit rating agencies promoted fiscal discipline during increasingly frequent election periods in emerging democracies.

Keywords: Debt Markets, Parliamentary Government, Bankruptcy and Resolution of Financial Distress, Emerging Markets

Suggested Citation

Hanusch, Marek and Vaaler, Paul M., Credit Rating Agencies in Emerging Democracies: Guardians of Fiscal Discipline? (March 1, 2013). World Bank Policy Research Working Paper No. 6379, Available at SSRN: https://ssrn.com/abstract=2228569

Marek Hanusch (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

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