Rating Sovereign Debt in a Monetary Union – Original Sin by Transnational Governance

Finn Marten Körner , Hans-Michael Trautwein , (2015) "Rating sovereign debt in a monetary union – original sin by transnational governance", The Journal of Risk Finance, Vol. 16 Iss: 3, pp.253 - 283

ZenTra Working Paper in Transnational Studies No. 35 / 2014

Posted: 25 Jun 2014 Last revised: 27 Dec 2016

See all articles by Finn Marten Körner

Finn Marten Körner

ZenTra - Center for Transnational Studies; Uniper SE

Hans‐Michael Trautwein

Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies

Date Written: June 24, 2014

Abstract

It is frequently argued that credit rating agencies (CRAs) have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU). They are believed to have under-rated sovereign risk in the early years of EMU, when integrated financial markets provided easier access to liquidity, and to have contributed to the recent Eurozone debt crisis by over-rating the lack of (individual) monetary sovereignty that EMU entails for its member states. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. We examine the major CRAs’ methodologies for rating sovereign debt and test their ratings for a monetary union bonus in good times and a malus, akin to the 'original sin' problem of emerging market countries, in bad times. Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, we find some evidence that EMU countries received a rating bonus on euro-denominated debt before the global financial crisis and a large penalty after 2007.

Keywords: Credit rating agencies, rating methodologies, sovereign debt, monetary union

JEL Classification: E42, F32, F33, G24, H63

Suggested Citation

Körner, Finn Marten and Trautwein, Hans-Michael, Rating Sovereign Debt in a Monetary Union – Original Sin by Transnational Governance (June 24, 2014). Finn Marten Körner , Hans-Michael Trautwein , (2015) "Rating sovereign debt in a monetary union – original sin by transnational governance", The Journal of Risk Finance, Vol. 16 Iss: 3, pp.253 - 283; ZenTra Working Paper in Transnational Studies No. 35 / 2014. Available at SSRN: https://ssrn.com/abstract=2458378 or http://dx.doi.org/10.2139/ssrn.2458378

Finn Marten Körner (Contact Author)

ZenTra - Center for Transnational Studies ( email )

Carl von Ossietzky University of Oldenburg
Ammerländer Heerstraße 138
Oldenburg, 26129
Germany

HOME PAGE: http://www.zen-tra.de

Uniper SE ( email )

E.ON-Platz 1
Düsseldorf, 40479
Germany

HOME PAGE: http://https://www.uniper.energy/

Hans-Michael Trautwein

Carl von Ossietzky Universität Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

HOME PAGE: http://www.iw.uni-oldenburg.de/

ZenTra - Center for Transnational Studies ( email )

Ammerländer Heerstraße 138
Oldenburg, 26131
Germany

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