Default, Currency Crises, and Sovereign Credit Ratings

Default, Currency Crises, and Sovereign Credit Ratings

Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically pred...

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Bibliographic Details
Main Author:	Reinhart, Carmen M.
Format:	Journal Article
Language:	English en_US
Published:	Washington, DC: World Bank 2014
Subjects:	ARREARS ASSET PRICE BAILOUT BAILOUTS BALANCE SHEET BANK DEBT BANK FAILURES BANKING CRISES BOND BONDHOLDERS BUDGET DEFICIT CAPITAL ACCOUNTS CAPITAL INFLOWS COMMERCIAL CREDITORS COMMERCIAL DEBT CREDIT RATING CREDIT RATING AGENCIES CREDIT RATINGS CREDITORS CREDITWORTHINESS CRISES IN EMERGING MARKET CRISES IN EMERGING MARKETS CURRENCY CURRENCY CRISES CURRENCY CRISIS CURRENCY OVERVALUATION CURRENT ACCOUNT CURRENT ACCOUNT BALANCE DEBT DEBT CRISES DEBT CRISIS DEBT DEFAULT DEBT OUTSTANDING DEBT PROBLEMS DEBT RATING DEBT RATINGS DEBT REPAYMENTS DEBT RESTRUCTURING DEBT RESTRUCTURING AGREEMENT DEBT SERVICING DEFAULT PROBABILITY DEFAULTS DEPENDENT DEPENDENT VARIABLE DEPRECIATIONS DESCRIPTIVE STATISTICS DEVALUATION DEVALUATIONS DOMESTIC CURRENCY DUMMY VARIABLE ECONOMIC DEVELOPMENT ECONOMIC POLICY EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EQUAL SHARE EXCHANGE MARKETS EXCHANGE RATE EXCHANGE RATE CRISES EXCHANGE RATE MECHANISM EXCHANGE RATE REGIME EXPLANATORY VARIABLE EXPORT RATIO EXPORT RATIOS EXTERNAL DEBT FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DISTRESS FINANCIAL MANAGEMENT FINANCIAL MARKETS FINANCIAL STRESS FINANCIAL SUPPORT FINANCIAL SYSTEM FINANCIAL VULNERABILITY FOREIGN CURRENCY FOREIGN CURRENCY DEBT GLOBAL DEVELOPMENT FINANCE GLOBAL FINANCIAL SYSTEM INCOME INFLATION INFLATION EPISODE INFLATION RATE INSTITUTIONAL INVESTOR INSTITUTIONAL INVESTORS INTEREST RATE INTEREST RATE SPREADS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL CREDIT INTERNATIONAL ECONOMICS INTERNATIONAL ECONOMY INTERNATIONAL INTEREST INTERNATIONAL INTEREST RATE INTERNATIONAL LENDING INTERNATIONAL MONETARY FUND LIQUIDITY LOAN LOCAL CURRENCY LONG-TERM DEBT LOW-INCOME COUNTRIES MACROECONOMIC INDICATORS MARKET CONDITIONS MARKET RISK MISALIGNMENTS MONETARY FUND OUTPUT OUTSTANDING DEBT POLITICAL ECONOMY PRICE BEHAVIOR PROBABILITY OF DEFAULT REAL EXCHANGE RATE RECESSIONS REMEDIES RESERVE RESERVES RISK OF DEFAULT SAVINGS SERIAL CORRELATION SHORT-TERM CAPITAL SHORT-TERM DEBT SOVEREIGN BONDS SOVEREIGN DEBT SOVEREIGN DEFAULT SOVEREIGN DEFAULTS SOVEREIGN RATING SOVEREIGN RATINGS SOVEREIGN RISK STANDARD DEVIATION STANDARD DEVIATIONS STOCK RETURNS TIME HORIZONS TRACK RECORD VOLATILITIES WEIGHTS WORLD INTEREST RATES YIELD SPREADS
Online Access:	http://documents.worldbank.org/curated/en/2002/05/17737432/financial-crises-credit-ratings-bank-failure-default-currency-crises-sovereign-credit-ratings http://hdl.handle.net/10986/17199

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Summary:	Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically predict currency crises. In practice, in emerging market economies there is a strong link between currency crises and default. Hence if credit ratings are forward-looking and currency crises in emerging market economies are linked to defaults, it follows that downgrades in credit ratings should systematically precede currency crises. This article presents results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults. Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.