Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises
National Bank of Poland Working Paper No. 177
39 Pages Posted: 19 Aug 2015 Last revised: 8 Jul 2016
Date Written: May 15, 2014
This paper studies the impact of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yelds of French, Italian and Spanish bonds but lowered the German’s bond yields, although the Germany’s rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from this findings that CRA announcements significantly influenced crisis-time capital allocation in Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states’ debt into more stable borrowers’ securities.
Keywords: Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate
JEL Classification: G21, G01, G12, G14, E42, E43, E44, F31, F42, F65
Suggested Citation: Suggested Citation