Sovereign Ratings in the Post-Crisis World: An Analysis of Actual, Shadow and Relative Risk Ratings

29 Pages Posted: 20 Apr 2016

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Supriyo De

World Bank

Dilip Ratha

World Bank

Hans Timmer

World Bank

Date Written: October 1, 2013

Abstract

This paper analyzes the evolution of sovereign credit ratings in the wake of the global financial crisis by studying changes in actual, shadow, and relative ratings between 2008 and 2012. For countries that do not have a rating from the major rating agencies, shadow ratings are estimated as a function of macroeconomic, structural, and governance variables. The shadow rating exercise confirms earlier findings in the literature that even after the financial crisis, many unrated countries appear to be more creditworthy than previously believed and can access international capital markets. The paper also develops a new rating scale called the "relative risk rating," which ranks countries according to their actual or shadow ratings after controlling for changes in the world weighted average rating. When relative ratings in 2012 are compared with the first half of 2008, the world average rating is found to be weaker because of the financial crisis. The relative rating improved in developing economies such as Azerbaijan, Ethiopia, Kazakhstan, Indonesia, and the Philippines, whereas it deteriorated in crisis-affected high-income countries such as Cyprus, Greece, Spain, Portugal, Ireland, and Egypt. Interestingly, India, Jordan, Poland, and the United Kingdom had their rating outlook downgraded by the rating agencies, but their relative rating actually improved as other countries suffered even worse downgrades. A regression model is used to analyze the relative contributions of different variables to rating changes during 2008-2012, a helpful feature for policy makers interested in improving sovereign ratings.

Keywords: Debt Markets, Emerging Markets, Banks & Banking Reform, Economic Theory & Research, Currencies and Exchange Rates

Suggested Citation

Basu, Kaushik and De, Supriyo and Ratha, Dilip and Timmer, Hans, Sovereign Ratings in the Post-Crisis World: An Analysis of Actual, Shadow and Relative Risk Ratings (October 1, 2013). World Bank Policy Research Working Paper No. 6641. Available at SSRN: https://ssrn.com/abstract=2337259

Kaushik Basu

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
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IZA Institute of Labor Economics

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Brookings Institution ( email )

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Supriyo De

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Dilip Ratha

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Hans Timmer

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/htimmer

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