scholarly journals Sovereign credit ratings and CDS spreads in Emerging Europe

Equilibrium ◽  
2020 ◽  
Vol 15 (3) ◽  
pp. 419-438
Author(s):  
Łukasz Dopierała ◽  
Daria Ilczuk ◽  
Liwiusz Wojciechowski
Keyword(s):  
Financial Markets ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Value Added ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
The Impact

Research background: Sovereign credit ratings play an important role in determining any country’s access to the international debt market. During the global financial crisis and the European debt crisis, credit rating agencies were harshly criticized for the timing of their announcements regarding ratings downgrades and the ranges of those downgrades. Therefore, it is worth considering whether the sovereign credit rating is still a useful benchmark for investors. Purpose of the article: This article examines whether credit rating agencies still provide financial markets with new information about the solvency of governments in Emerging Europe countries. In addition, it describes the differences in the effect of particular types of rating events on financial markets and the impact of individual agencies on the market situation. Our study also focuses on evaluating these occurrences at different stages of the business cycle. Methods: This article uses data about ratings events that took place between 2008 and 2018 in 17 Emerging Europe economies. We took into consideration positive, neutral, and negative events related to ratings changes and the outlooks reported by Fitch Ratings, Moody’s, and Standard & Poor’s. We used a methodology based on event studies. In addition, we performed Wilcoxon signed-ranks test and used a logit model to determine the usefulness of cumulative adjusted credit default swap (CDS) spread changes in predicting the direction of ratings changes. Findings & Value added: Our research provides evidence that the CDS market reflects information regarding government issuers up to three months before ratings downgrades are announced. Information reported to the market by ratings agencies is only relevant in the short timeframe surrounding ratings downgrades and upgrades. However, positive credit rating changes convey more information to the market. We also found strong evidence that, in the post-crisis period, credit ratings provide markets with less information.

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

scholarly journals The Role of Credit Rating Agencies in Sovereign Debt Markets

2018 ◽  
pp. 146-166
Author(s):  
Aline Darbellay
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Past Century ◽  
The European Union ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Since the global financial crisis of 2007-2009, the leading credit rating agencies (CRAs) have faced an increasing level of legal and regulatory scrutiny in the United States (US) and in the European Union (EU). This chapter sheds light on the promise and perils of sovereign credit ratings in the light of the European sovereign debt crisis. The leading CRAs have been blamed for providing investors with inaccurate credit ratings, facing inappropriate incentives and lack of oversight. This chapter addresses the evolving function performed by CRAs over the past century. Traditionally, CRAs are private market actors assessing the creditworthiness of borrowers and debt instruments. Since the first sovereign bond ratings assigned in 1918, the rating business has grown in size and importance. Sovereign ratings supposedly predict financial distress of governments. Their role has shifted over the last four decades. Although they have repeatedly been blamed for being poor predictors of sovereign debt crises, CRAs continue to play a key role in modern capital markets.

The impact of risk rating agencies decisions on investment and economic growth in South Africa

2020 ◽  
Vol 11 (1) ◽  
pp. 109-109
Author(s):  
Daniel Meyer ◽  
Lerato Mothibi
Keyword(s):  
Economic Growth ◽  
South Africa ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Primary Objective ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Investment Grade ◽  
The Impact

Over the last decade, the South African economy has endured prevailing economic challenges including weak economic growth, unreliable electricity supply, rising fiscal deficits, sub-duded investment inflows and the inexorable rise in government debt alongside the expected impact of the corona virus pandemic. Credit ratings have greatly evolved making them key elements in the modern financial markets because of their opinions of credit worthiness, as many investors across the globe relay heavily on their opinions. South Africa unlike many of its developing counterparts, has since struggled to maintain its sovereign ratings above non-investment grade since the 2007/2008 global financial crisis. Despite the economic constraints faced by the country, the sovereign credit downgrade path has landed the country's financial stance back prior to democracy, following the loss of investment grade rating from the big three credit rating agencies. The significance of credit ratings on investments and growth has therefore come to the fore, as having an understanding of how credit ratings affect investments and economic growth in South Africa is crucial for the formulation of key strategies that should be developed to stimulate and attract investments, as well as encourage and promote long term growth and development. The primary objective of this study is therefore to analyse the impact of sovereign credit rating on investments and economic growth in South Africa.

scholarly journals Impact of Sovereign Credit Ratings on Capital Markets

2017 ◽  
Author(s):  
Mustafa Batuhan Tufaner ◽  
Sıtkı Sönmezer ◽  
Ahmet Alkan Çelik
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Stock Price ◽  
Credit Rating ◽  
Credit Ratings ◽  
Rating Agencies ◽  
Political Situation ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Rating Changes

Sovereign credit ratings are of great importance in terms of country's economy in recent years. Sovereign credit ratings can greatly affect both financial markets and macroeconomic balances. On the other hand, these credit ratings are closely related to the political situation of the countries. Therefore, all factors behind the credit rating announcements operating in global markets needs to be put forward. The content of this paper is to identify policy interest reaction towards sovereign credit ratings and examine of countries that experienced severe rating changes. In this bulletin, big three credit rating agencies are compared and critically assessed various credit rating of Turkey. The analyzed dataset covers sovereign rating announcements released by reputable rating agencies, stock price, Dollar / TL exchange rate, Dollar / Euro exchange rate and benchmark bond.

scholarly journals Determination of Sovereign Credit Rating Model for European Countries

2021 ◽  
Vol 5 (3) ◽  
Author(s):  
Isik Akin
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Rating Model ◽  
Sovereign Credit Rating

Credit rating agencies play a key role in financial markets, as they help to reduce asymmetric information among market participants via credit ratings. The credit ratings determined by the credit rating agencies reflect the opinion of whether a country can fulfil the liability or its credit reliability at a particular time. Therefore, credit ratings are a very valuable tool, especially for investors. In addition, the issue that credit rating agencies are generally criticised is that they are unsuccessful in times of financial crisis. Credit rating methodologies of credit rating agencies have been subject to intense criticism, especially after the 2007/08 Global Financial Crisis. Some of the criticised issues are that credit rating agencies’ methodologies are not transparent; they are unable to make ratings on time, and they make incorrect ratings. In order to create a more reliable credit rating methodology, the credit rating industry and the ratings determined by rating agencies need to be critically examined and further investigated in this area. For this reason, in this study credit rating model has been developed for countries. Supervisory and regulatory variables, political indicators and macroeconomic factors were used as independent variables for the sovereign credit rating model. As a result of the study, the new sovereign credit rating calculates exactly the same credit rating with Fitch Rating Agency for developed countries, but there are 1 or 2 points differences for developing countries. In order to better understand the reason for these differences, credit rating agencies need to make their methodologies more transparent and disclose them to the public.

scholarly journals Three Letters that Move the Markets: Credit Ratings between Market Information and Legal Regulation

2017 ◽  
Author(s):  
Ulrich G. Schroeter
Keyword(s):  
Financial Markets ◽  
Applied Research ◽  
Credit Rating ◽  
Credit Ratings ◽  
Legal Regulation ◽  
Legal Regulations ◽  
Market Information ◽  
Market Reactions ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Journal of Applied Research in Accounting and Finance, Vol. 6, No. 1 (2011), pp. 14-30As demonstrated by the market reactions to downgrades of various sovereign credit ratings in 2011, the credit rating agencies occupy an important role in today’s globalized financial markets. This article provides an overview of the central characteristics of credit ratings and discusses risks arising from both their widespread use as market information and from the increasing references to credit ratings contained in laws, legal regulations and private contracts.

Sovereign credit ratings, relative risk ratings and private capital flows: evidence from emerging and frontier markets

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Supriyo De ◽  
Sanket Mohapatra ◽  
Dilip Ratha
Keyword(s):  
Relative Risk ◽  
Capital Flows ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Private Capital ◽  
Content Type ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Private Capital Flows ◽  
The Impact

Purpose Relative risk ratings measure the degree by which a country’s sovereign rating is better or worse than other countries (Basu et al., 2013). However, the literature on the impacts of sovereign ratings on capital flows has not covered the role of relative risk ratings. This paper aims to examine the effect of relative risk ratings on private capital flows to emerging and frontier market economies is filled. In the analysis, the effect of relative risk ratings to that of absolute sovereign ratings in influencing private capital flows are compared. Design/methodology/approach This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies using quarterly data for a 20-year period between 1998 and 2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows such as growth and interest rate differentials and global risk conditions. Findings The analysis finds that while absolute sovereign credit ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. The main results are robust to an alternate measure of capital flows (gross capital flows instead of net capital flows), to the use of fixed gross domestic product weights in calculating relative risk ratings and to the potential endogeneity of absolute and relative ratings. Originality/value This study advances the literature on being the first attempt to understand the impact of relative risk ratings on capital flows and also comparing the impact of absolute sovereign ratings and relative risk ratings on capital flows in the pre- and post-global financial crisis periods. The findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings.

scholarly journals Failed Attempt to Break Up the Oligopoly in Sovereign Credit Rating Market after Financial Crises

2021 ◽  
Vol 15 (2) ◽  
pp. 152-163
Author(s):  
Alicja Malewska
Keyword(s):  
Financial Crises ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Credit Ratings ◽  
The United States ◽  
The European Union ◽  
Case Study Methodology ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

For decades, the credit rating market has been dominated by three major agencies (Moody's, S&P and Fitch Ratings). Their oligopolistic dominance is especially strong in sovereign credit ratings industry, where they hold a collective global share of more than 99%. Global financial crisis and the Eurozone sovereign debt crisis exposed serious flaws in rating process and forced public authorities to act. This study investigates effectiveness of new regulations adopted in the United States and in the European Union after financial crises in terms of reducing oligopolistic dominance of the “Big Three” in sovereign credit ratings market. The study applies descriptive statistical analysis of economic indicators describing concentration rate in a market, as well as content analysis of legal acts and case study methodology. Analysis shows that the Dodd-Frank reform and new European rules on supervision of credit rating agencies were not effective enough and did not lead to the increased competition in the market. The evidence from this study is explained using two alternative perspectives – economic theory of natural oligopoly and hegemonic stability theory coming from international relations field.

The geographical and income differences in the determinants of African sovereign credit ratings

2020 ◽  
Vol 11 (4) ◽  
pp. 609-624
Author(s):  
Ilse Botha ◽  
Marinda Pretorius
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Additional Information ◽  
Income Groups ◽  
Sovereign Credit Ratings ◽  
Developmental Indicators

PurposeThe importance of obtaining a sovereign credit rating from an agency is still underrated in Africa. Literature on the determinants of sovereign credit ratings in Africa is scarce. The purpose of this research is to determine what the determinants are for sovereign credit ratings in Africa and whether these determinants differ between regions and income groups.Design/methodology/approachA sample of 19 African countries' determinants of sovereign credit ratings are compared between 2007 and 2014 using a panel-ordered probit approach.FindingsThe findings indicated that the determinants of sovereign credit ratings differ between African regions and income groups. The developmental indicators were the most significant determinants across all income groups and regions. The results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa.Originality/valueThe results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa. Rating agencies follow the same rating assignment process for developed and developing countries, which means investors will have to supplement the allocated credit rating with additional information. Africa can attract more investment if African countries obtain formal, accurate sovereign credit ratings, which take the characteristics of the continent into consideration.

Part VII International Securities, Including Markets and Clearing Systems, 21 Credit Rating Agencies

2021 ◽  
Author(s):  
Eborall Charlotte
Keyword(s):  
Information Asymmetry ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
The United States ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Participants ◽  
The Global Financial Crisis ◽  
Independent Assessment

This chapter concentrates on credit rating agencies (CRAs), which play a key role in financial markets. It explains how CRAs help reduce information asymmetry between investors and issuers by providing an independent assessment of the relative creditworthiness of countries or companies. It also describes how CRA's role has expanded significantly in recent decades with financial globalization, such as the introduction of references to credit ratings in regulations and the embedding by market participants of ratings in their operating procedures, investment decisions, and contracts. This chapter identifies the heavy reliance on CRAs as one of the main contributors to the global financial crisis in 2008. It also talks about the efficacy of CRAs' credit ratings after 2008, in which regulators in the United States (US) and Europe introduced new regulations intended to address the reliability of CRAs' predictions of probability of default.

Sign in / Sign up

Export Citation Format

Share Document