Credit Ratings and the Pricing of Sovereign Debt During the Euro Crisis

38 Pages Posted: 18 Jun 2013

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Mahir Binici

Central Bank of Turkey

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Date Written: June 2013

Abstract

This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries. However, the association between credit rating changes and spreads shifted markedly between the pre-crisis and crisis periods. European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but that large differences emerged during the crisis period between the now highly-sensitive GIIPS group and other European country groupings (EU and Euro Area excluding GIIPS, and the non-EU area). We also find a complicated non-linear pattern dependent on the level of the credit rating. The results are robust to the including credit "outlook" or "watch" signals by credit rating agencies. In addition, contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are taken into account.

Suggested Citation

Aizenman, Joshua and Binici, Mahir and Hutchison, Michael M., Credit Ratings and the Pricing of Sovereign Debt During the Euro Crisis (June 2013). NBER Working Paper No. w19125. Available at SSRN: https://ssrn.com/abstract=2280977

Joshua Aizenman

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mahir Binici

Central Bank of Turkey ( email )

Ankara, Ankara 06050
Turkey

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

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