The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases

35 Pages Posted: 24 Apr 2019

See all articles by Luca Agnello

Luca Agnello

University of Palermo - Department of Economics; ECB Fiscal Policies Division

Vítor Castro

Loughborough University

Ricardo Sousa

European Stability Mechanism

Date Written: February 4, 2019

Abstract

Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we rely on discrete-time Weibull models to investigate the duration and determinants of sovereign ratings phases. We find that the likelihood of the end of the 'speculative-grade' phase increases as time goes by (i.e. positive duration dependence), but the 'investment-grade' phase is not duration dependent. Thus, for sovereigns rated as speculative, the build-up of reputation as good borrowers is a gradual process, whereas the reputation of investment-grade sovereigns solidifies and remains unchanged as time passes. However, the length of both phases has proven to be significantly dependent on the country's economic conditions and the quality of governance. In particular, lower inflation, better economic performance and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, a better perception of the quality of public services and the ability of the government to formulate and implement sound policies and regulations help to reduce the duration of speculative-grade phases.

Keywords: duration analysis, Weibull model, duration dependence, sovereign ratings, speculative-grade, economic environment, fiscal position, quality of governance

JEL Classification: G10, G15, G24, C23, C25

Suggested Citation

Agnello, Luca and Castro, Vítor and Sousa, Ricardo, The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases (February 4, 2019). European Stability Mechanism Working Paper No. 34 (2019). Available at SSRN: https://ssrn.com/abstract=3376466 or http://dx.doi.org/10.2139/ssrn.3376466

Luca Agnello

University of Palermo - Department of Economics ( email )

Viale delle Scienze
Palermo, 90100
Italy

ECB Fiscal Policies Division ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Vítor Castro

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Ricardo Sousa (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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