Short- and long-run determinants of sovereign debt credit ratings

Abstract

We study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. Using linear methods and ordered response models we employ a new specification that allows us to distinguish between short and long-run effects, on a country's rating, of several macroeconomic and fiscal explanatory variables. The results point to a good performance of the estimated models, across agencies and time, as well as a good overall prediction power. Changes in GDP per capita, GDP growth, government debt, government balance have a short-run impact on a country's credit rating, while government effectiveness, external debt, foreign reserves and default history are important long-run determinants.JEL: C23; C25; E44; F30; G15

The Causes and Economic Consequences of Patent Litigation

“…This is an indication that raters may take into account the engagement-specific expertise of auditors in their rating decisions. This contributes to an understanding of the economic consequences of litigation and determinants of credit rating (Güttler and Wahrenburg, 2007;Jorion et al, 2009;Güntay and Hackbarth, 2010;Afonso et al, 2011). Our findings also address the debate as to whether credit ratings provide useful information to investors (Crabtree and Maher, 2005;Yi and Mullineaux, 2006;Cheng and Neamtiu, 2009; U.S. Department of Justice, 2013).…”

The Determinants of Sovereign Bond Yield Spreads in the EMU

“…Given the superior state of their fiscal fundamentals, the latter are more likely to be members of the core group. Therefore, increasing core-periphery 11 See Afonso et al (2011) for details on the construction of the rating scales presented in Table A2 in the Appendix. divergence signals an increased probability of aggregating fiscal risks at the EU-level, and increased future borrowing requirements from the core group to cover the potential support efforts. Through this channel, increasing core-periphery divergence may cause transmission of the crisis from the periphery group to the core group.…”

Do Fiscal Imbalances Deteriorate Sovereign Debt Ratings ?

“…We can also see from Table 1 that roughly the rating agencies tend to put more weight on the fiscal variables. An increase of 5 percentage points in the fiscal deficit would 2 We used the same dataset as Afonso et al (2011), which includes macro variables (GDP per capita, real GDP growth, unemployment rate and inflation),fiscal variables (government debt, budget balance and government effectiveness), external variables (external debt, current account balance and foreign reserves), regional dummies and a dummy if the country has previously defaulted. The sample ran from 1996 to 2006.…”

“…Afonso, Gomes and Rother (2011) initially estimated rating models with panel data, using both linear estimation methods and ordered response models.…”