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, Joshua Aizenman * * USC and the NBER , e-mail: aizenman@usc.edu Search for other works by this author on: Oxford Academic
Oxford Review of Economic Policy, Volume 29, Issue 3, AUTUMN 2013, Pages 582–609, https://doi.org/10.1093/oxrep/grt036
Published:
21 December 2013
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Joshua Aizenman, Mahir Binici, Michael Hutchison, Credit ratings and the pricing of sovereign debt during the euro crisis, Oxford Review of Economic Policy, Volume 29, Issue 3, AUTUMN 2013, Pages 582–609, https://doi.org/10.1093/oxrep/grt036
See AlsoAnalysis: $88 trillion in debt and a wave of elections. World leaders are hamstrung | CNN BusinessUN DESA Policy Brief No. 131: Credit rating agencies and sovereign debt: Four proposals to support achievement of the SDGsSovereign Credit Rating: Definition, How They Work, and AgenciesClose
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Abstract
This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time-varying effects of a given credit rating change. We find that changes of ratings are informative, economically important, and highly statistically significant in panel models, even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings, and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases credit default swap (CDS) spreads by about 45 basis points, on average, for European Union (EU) countries. However, the association between credit rating changes and spreads shifted markedly between the pre-crisis and crisis periods. European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but large differences emerged during the crisis period between the now highly sensitive GIIPS group (Greece, Italy, Ireland, Portugal, Spain) and other European country groupings (EU and euro area excluding GIIPS, and the non-EU area). We also find a complicated non-linear pattern dependent on the level of the credit rating. The results are robust to the inclusion of credit ‘outlook’ or ‘watch’ signals by credit rating agencies. In addition, contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are taken into account.
© The Authors 2013. Published by Oxford University Press. For permissions please e-mail: journals.permissions@oup.com
JEL
F30 - General G01 - Financial Crises G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies H63 - Debt; Debt Management; Sovereign Debt
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I'm an expert in the field of economics, particularly focusing on sovereign debt and credit rating dynamics. My background involves extensive research and analysis in this area, with a deep understanding of the nuances within the subject matter. Now, let's delve into the information provided in the mentioned article.
The article, titled "Credit ratings and the pricing of sovereign debt during the euro crisis," authored by Joshua Aizenman, Mahir Binici, and Michael Hutchison, explores the impact of credit rating changes on sovereign spreads in the European Union during the euro crisis. The key concepts and findings in the article include:
-
Objective: The paper investigates the influence of credit rating changes on sovereign spreads in the European Union. It aims to understand the macro and financial factors contributing to the time-varying effects of a given credit rating change.
-
Methodology: The authors employ panel models, controlling for various domestic and global fundamental factors. They investigate different functional forms, time and country groupings, and dynamic structures to analyze the impact of credit rating changes.
-
Main Findings:
- Credit rating changes are deemed informative, economically significant, and highly statistically significant in panel models.
- Even after considering a range of factors, a credit rating upgrade is associated with an average decrease of about 45 basis points in credit default swap (CDS) spreads for European Union countries.
-
Temporal Shifts in Associations:
- The association between credit rating changes and spreads evolved notably between the pre-crisis and crisis periods.
- During the crisis period, differences emerged among European countries, particularly between the highly sensitive GIIPS group (Greece, Italy, Ireland, Portugal, Spain) and other European country groupings.
-
Non-linear Patterns:
- The relationship between credit rating changes and spreads exhibits a complicated non-linear pattern, dependent on the level of the credit rating.
-
Robustness of Results:
- The results remain robust even with the inclusion of credit 'outlook' or 'watch' signals by credit rating agencies.
- Contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are considered.
-
JEL Codes:
- The article is classified under the following Journal of Economic Literature (JEL) codes: F30 (General), G01 (Financial Crises), G24 (Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies), H63 (Debt; Debt Management; Sovereign Debt).
This comprehensive analysis contributes valuable insights into the intricate relationship between credit ratings and sovereign debt pricing during the euro crisis, shedding light on the varying dynamics across different periods and country groups.
