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

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College

Margarita Karpava

MediaCom

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Andreas Stephan

Jonkoping University, Jonkoping International Business School

Date Written: May 15, 2014

Abstract

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

Baum, Christopher F. and Karpava, Margarita and Schaefer, Dorothea and Stephan, Andreas, Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (May 15, 2014). National Bank of Poland Working Paper No. 177, Available at SSRN: https://ssrn.com/abstract=2646513 or http://dx.doi.org/10.2139/ssrn.2646513

Christopher F. Baum (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Margarita Karpava

MediaCom ( email )

124 Theobalds Rd.
London, WC1X 8RX
United Kingdom

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

Andreas Stephan

Jonkoping University, Jonkoping International Business School ( email )

SE-551 11 Jonkoping
Sweden
55111 (Fax)

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