The 1990s have witnessed pronounced boom-bust cycles in emergingmarkets lending, culminating in the Asian financial and currency crisis of 1997-8. By examining the links between sovereign credit ratings and dollar bond yield spreads over 1989-97, this paper aims at broad empirical content for judging whether the three leading rating agencies -Moody's, Standard & Poor's and Fitch IBCA -can intensify or attenuate boom-bust cycles in emerging-market lending. First, an event study exploring the market response for 30 trading days before and after rating announcements finds a significant impact of imminent upgrades and implemented downgrades for a combination of ratings by the three leading agencies, despite strong anticipation of rating events. Second, a Granger causality test, by correcting for joint determinants of ratings and yield spreads, finds that changes in sovereign ratings are mutually interdependent with changes in bond yields. These findings are based on many more observations than just the highly publicized crisis episodes in Mexico and Asia. They imply that sovereign ratings have the potential to moderate euphoria among investors on emerging-market bonds, but that the rating agencies have failed to exploit that potential over the past decade.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in IntroductionCredit rating agencies were conspicuous among the many who failed to predict Mexico's economic 1994-95 crisis. While the December 20 devaluation of the peso rocked the world financial markets, until December 22 Standard and Poor's had Mexico's sovereign debt only one step below an investment grade rating with a "positive outlook". TheMexican crisis has thus produced the sentiment that rating agencies react to events rather than anticipating them and raised questions about how seriously investors should take sovereign ratings on developing countries.Our paper aims at broader empirical content for judging whether the two leading rating agencies lead or lag market events with respect to sovereign risk. The evidence will be based on announced as well as implemented ratings of sovereign bonds from the two major rating agencies for up to 49 OECD and non-OECD countries and their impact on yield spreads relative to US treasury bonds and on stock market returns. We go beyond an earlier study (Larrain, Reisen, von Maltzan,1997) by investigating whether credit ratings add to or dampen bond market and emerging stock market volatility.The next section will present a discussion on the potential of the rating industry to attenuate boom-bust cycles with overborrowing in the international capital markets.Section 2 will describe the country sample, the data and the methodology. Section 3 will present the econometric evidence on the interaction of sovereign yield spreads and changes in country ratings. We take three approaches: first, we perform Granger causality tests based on an unbalanced panel data set with yearly observations for the period 1988-95; second, we perform an event study to examine the daily reaction of sovereign yield spreads on rating change announcements and implemented rating changes between 1987 and 1996. For the third approach -also an event study -we use the historical volatility of sovereign bond yield spreads in order to measure country risk perception. Taking into account the strong sensitivity of stock markets towards news, we run the event study likewise for the historical volatility of stock market returns.Section 4 concludes. Sovereign Emerging-Market Risk and the Rating IndustryThe Asian crisis of 1997 and the Mexican crisis of 1994-95 have again demonstrated the vulnerability of emerging-market economies to financial crises associated with the reversal of excessive private capital inflows. The boom-bu...

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In principle, the sovereign credit rating industry could help mitigate the congestion externalities common to world capital markets that arise from the failure of market participants to internalise the social cost of external borrowings. This would require that modifications in ratings on government bonds convey new information to market participants, with changes in credit ratings leading to changes in country risk premia. Using panel data analysis and event studies this paper presents econometric evidence that changes in credit rating have a significant impact on international financial markets. In line with earlier studies, our event study finds a highly significant announcement effect when emerging-market sovereign bonds are put on review with negative outlook. Our findings imply that the sovereign rating industry has the potential to help dampen excessive private capital inflows into the emerging markets with negative rating announcements ... En principe, l’existence d’agences d’évaluation financière ( the sovereign credit rating industry ) pourrait contribuer à limiter les externalités dues à l’afflux de capitaux étrangers et communes à tous les marchés des capitaux du fait de l’incapacité des acteurs du marché à internaliser le coût social des emprunts extérieurs. Toute nouvelle cotation des obligations d’État devrait transmettre de nouvelles informations aux intervenants sur le marché et les changements dans les évaluations financières devraient se répercuter sur l’évolution du risque pays. Ce document technique repose sur une analyse en données de panel et sur des études de cas ; il ressort de l’analyse économétrique que les changements dans les cotations ont des répercussions importantes sur les marchés financiers internationaux. Notre analyse, qui s’inscrit dans le prolongement des travaux précédents, met en évidence un effet d’annonce très significatif quand les perspectives d’évolution des obligations d’État sur ...