Sovereign Credit Ratings pre and post crisis

Carmen Reinhart works on the sovereign credit ratings pre and post crisis in this oldish 2001 paper.

 

This paper has addressed the following questions: Do sovereign credit ratings systematically help predict currency and banking crises? If not, why not? What needs to change? What is the behavior of credit ratings following the crises? Are there important differences in the behavior of credit ratings between developed and emerging markets?

 

Her conclusion:

 

As to the ability of rating changes to anticipate financial crises, the empirical tests presented here on sovereign credit ratings and financial crises suggest that sovereign credit ratings systematically fail to anticipate banking and currency crises. This result appears to be robust across alternative crises definitions, model specification, and approaches. Only for the Institutional Investor ratings is there some (weak) evidence that downgrades precede currency crises. In none of the cases are banking crises systematically preceded by downgrades.

 

As regards the behavior of ratings after the crisis and differences between developed and emerging markets, there is evidence that sovereign credit ratings tend to be reactive– particularly when it comes to EMs. Both the probability of a downgrade and the magnitude of the downgrade are significantly higher for EMs. Taken together, these findings point to a procyclicality in the ratings.

 

 

Hmm.. Why do they fail?

 

On why are sovereign ratings such poor predictors of financial distress, we conclude that generally, financial crises are difficult to forecast–witness the poor performance of  international interest rate spreads and currency forecasts. Specifically, however, the results presented here offer a tentative (although partial) answer to this question. Rating agencies have tended to focus on the “wrong” set of fundamentals. For instance, much weight is given to debt-to-exports ratios–yet these have tended to be poor predictors of financial stress. Little weight is attached to indicators of liquidity, currency misalignments, and asset price behavior.

Hmmm. wondering ehat has changed.. The focus did shift to all the three factors listed at the end but still the performance of CRAs was much to be desired. Actually, too much weight is given to credit rating agencies. They have become too powewrful financial entities which is a bigger problem.

 

 

Advertisements

4 Responses to “Sovereign Credit Ratings pre and post crisis”

  1. Sovereign Credit Ratings pre and post crisis « Mostly Economics | Master Your Finances Says:

    […] here: Sovereign Credit Ratings pre and post crisis « Mostly Economics Share and […]

  2. Sovereign Credit Ratings pre and post crisis « Mostly Economics | Money Blog : 10 Dollars : Money Articles. Says:

    […] Go here to see the original: Sovereign Credit Ratings pre and post crisis « Mostly Economics […]

  3. Credit rating agencies make merry eitherways « Mostly Economics Says:

    […] has been a colossal failure, nasty comments leading to soul seraching. Their overall track record predicting sovereign risks is pretty bad as […]

  4. poor credit banking Says:

    Without using any, plc The feature?Pay some extra, core base rules.In his/her case, save it to.Prefer You can poor credit banking, go and dont de Morais stated.Starting that relationship, it AdCalls has.,

Leave a Reply to Sovereign Credit Ratings pre and post crisis « Mostly Economics | Money Blog : 10 Dollars : Money Articles. Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: