Credit Ratings and Fiscal Responsibility

The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fis...

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Main Authors: Hanusch, Marek, Vaaler, Paul
Format: Working Paper
Language:English
en_US
Published: 2015
Subjects:
Online Access:http://documents.worldbank.org/curated/en/2015/06/24677886/credit-rating-fiscal-responsibility
http://hdl.handle.net/10986/22363
id okr-10986-22363
recordtype oai_dc
spelling okr-10986-223632021-04-23T14:04:08Z Credit Ratings and Fiscal Responsibility Hanusch, Marek Vaaler, Paul MONETARY POLICY DEFICIT HOLDING CONTRACTUAL OBLIGATIONS TIMELY PAYMENT DEFAULTS STOCK FISCAL DEFICITS INDEBTED COUNTRIES INTEREST SOVEREIGN DEFAULTS REGULATORY STANDARDS INSTITUTIONAL INVESTORS LENDING LIMITS EXCHANGE GOVERNMENT REVENUES BOND SPREADS INFORMATION DEVELOPING COUNTRIES POLITICAL ECONOMY CREDIT RATING AGENCIES REVENUES PUBLIC DEBT DATA FISCAL POLICY BONDS LOAN CREDITWORTHINESS LOAN AGREEMENT BORROWERS PUBLIC BORROWING DEBT DATA BOND YIELDS SOVEREIGN DEFAULT BUDGETING RESERVE INFLATION INTERNATIONAL BANK PENSION CREDITOR DEVELOPING COUNTRY INSTRUMENTS BUDGET FISCAL POLICIES CREDIT RATINGS EXCHANGE COMMISSION CURRENCY MORAL HAZARD RESERVE BANK BOND YIELD FINANCES DEBT OUTSTANDING MONETARY FUND SOVEREIGN BOND EMERGING MARKET FINANCIAL INSTITUTIONS DEBT MARKETS SOVEREIGN RATING DEFICITS BUDGET DEFICIT BUSINESS CYCLE LENDERS BUDGET DEFICITS BORROWING COSTS GROSS DOMESTIC PRODUCT PENSION FUNDS FINANCE FOREIGN CURRENCY INTERNATIONAL FINANCIAL INSTITUTIONS TAXES ACCESS TO INFORMATION FISCAL DEFICIT EXPENDITURE INVESTORS SOVEREIGN RATINGS SOVEREIGN DEBT FEDERAL RESERVE ELECTIONS INTEREST PAYMENTS GOOD FEDERAL RESERVE BANK PRINCIPAL PAYMENTS GLOBAL MARKET TRANSPARENCY SOVEREIGN RISK ACCESS TO CAPITAL FINANCIAL CRISIS TURNOVER FUTURE NATIONAL DEBT FOREIGN INVESTMENT GOVERNMENT REVENUE EXPENDITURES PAYMENT OF INTEREST PROPERTY PROPERTIES FOREIGN BANKS DEFAULT MARKET CREDIT RATING MARKET RISK RISK OF DEFAULT SECURITIES PUBLIC DEBT SOLVENCY INSURANCE BUSINESS CYCLES CURRENCIES GOVERNMENT DEBT ECONOMIC DEVELOPMENT INTERESTS GOODS INVESTOR SECURITIES EXCHANGE FINANCIAL MARKET SOVEREIGN LIABILITIES INVESTMENT BOND SOVEREIGN BONDS SHARE PUBLIC FINANCES POVERTY FINANCIAL MARKETS REVENUE BONDHOLDERS PROFIT LENDING DEBT OFFERINGS CHECK EXCHANGE RATE FISCAL DISCIPLINE INSTRUMENT LOCAL CURRENCIES LIABILITIES ELECTION FINANCIAL OPENNESS DEVELOPMENT BANK The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fiscal expansions are heightened. The literature on political budget cycles documents the tendency for budget deficits to increase in election years as governments attempt to appear economically competent by strategically providing additional publicly financed goods or services, or by cutting taxes. A rating downgrade, however, signals the opposite of competence as it implies an increase in the probability of sovereign default. Since credit ratings are widely observed - by financial markets as well as voters - they in effect serve as a disciplining device for fiscal policy not to submit to short-term spending pressures, thus keeping it responsible. The authors find that: (1) governments going into an election year immediately after a rating downgrade are 27 percentage points more likely to lose at the polls; and (2) governments going into an election year with a negative rating outlook (indicating a higher likelihood of a near-term downgrade) run smaller budget deficits compared to cases with positive or stable outlooks. Ratings act like fiscal rules disciplining governments when they are more vulnerable to political pressures on the budget - as opposed to fiscal policies supporting longer-term economic growth and development objectives. 2015-07-31T16:44:45Z 2015-07-31T16:44:45Z 2015-06 Working Paper http://documents.worldbank.org/curated/en/2015/06/24677886/credit-rating-fiscal-responsibility http://hdl.handle.net/10986/22363 English en_US MFM Discussion Paper,No. 4; CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research Publications & Research :: Working Paper
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
en_US
topic MONETARY POLICY
DEFICIT
HOLDING
CONTRACTUAL OBLIGATIONS
TIMELY PAYMENT
DEFAULTS
STOCK
FISCAL DEFICITS
INDEBTED COUNTRIES
INTEREST
SOVEREIGN DEFAULTS
REGULATORY STANDARDS
INSTITUTIONAL INVESTORS
LENDING LIMITS
EXCHANGE
GOVERNMENT REVENUES
BOND SPREADS
INFORMATION
DEVELOPING COUNTRIES
POLITICAL ECONOMY
CREDIT RATING AGENCIES
REVENUES
PUBLIC DEBT DATA
FISCAL POLICY
BONDS
LOAN
CREDITWORTHINESS
LOAN AGREEMENT
BORROWERS
PUBLIC BORROWING
DEBT DATA
BOND YIELDS
SOVEREIGN DEFAULT
BUDGETING
RESERVE
INFLATION
INTERNATIONAL BANK
PENSION
CREDITOR
DEVELOPING COUNTRY
INSTRUMENTS
BUDGET
FISCAL POLICIES
CREDIT RATINGS
EXCHANGE COMMISSION
CURRENCY
MORAL HAZARD
RESERVE BANK
BOND YIELD
FINANCES
DEBT OUTSTANDING
MONETARY FUND
SOVEREIGN BOND
EMERGING MARKET
FINANCIAL INSTITUTIONS
DEBT
MARKETS
SOVEREIGN RATING
DEFICITS
BUDGET DEFICIT
BUSINESS CYCLE
LENDERS
BUDGET DEFICITS
BORROWING COSTS
GROSS DOMESTIC PRODUCT
PENSION FUNDS
FINANCE
FOREIGN CURRENCY
INTERNATIONAL FINANCIAL INSTITUTIONS
TAXES
ACCESS TO INFORMATION
FISCAL DEFICIT
EXPENDITURE
INVESTORS
SOVEREIGN RATINGS
SOVEREIGN DEBT
FEDERAL RESERVE
ELECTIONS
INTEREST PAYMENTS
GOOD
FEDERAL RESERVE BANK
PRINCIPAL PAYMENTS
GLOBAL MARKET
TRANSPARENCY
SOVEREIGN RISK
ACCESS TO CAPITAL
FINANCIAL CRISIS
TURNOVER
FUTURE
NATIONAL DEBT
FOREIGN INVESTMENT
GOVERNMENT REVENUE
EXPENDITURES
PAYMENT OF INTEREST
PROPERTY
PROPERTIES
FOREIGN BANKS
DEFAULT
MARKET
CREDIT RATING
MARKET RISK
RISK OF DEFAULT
SECURITIES
PUBLIC DEBT
SOLVENCY
INSURANCE
BUSINESS CYCLES
CURRENCIES
GOVERNMENT DEBT
ECONOMIC DEVELOPMENT
INTERESTS
GOODS
INVESTOR
SECURITIES EXCHANGE
FINANCIAL MARKET
SOVEREIGN LIABILITIES
INVESTMENT
BOND
SOVEREIGN BONDS
SHARE
PUBLIC FINANCES
POVERTY
FINANCIAL MARKETS
REVENUE
BONDHOLDERS
PROFIT
LENDING
DEBT OFFERINGS
CHECK
EXCHANGE RATE
FISCAL DISCIPLINE
INSTRUMENT
LOCAL CURRENCIES
LIABILITIES
ELECTION
FINANCIAL OPENNESS
DEVELOPMENT BANK
spellingShingle MONETARY POLICY
DEFICIT
HOLDING
CONTRACTUAL OBLIGATIONS
TIMELY PAYMENT
DEFAULTS
STOCK
FISCAL DEFICITS
INDEBTED COUNTRIES
INTEREST
SOVEREIGN DEFAULTS
REGULATORY STANDARDS
INSTITUTIONAL INVESTORS
LENDING LIMITS
EXCHANGE
GOVERNMENT REVENUES
BOND SPREADS
INFORMATION
DEVELOPING COUNTRIES
POLITICAL ECONOMY
CREDIT RATING AGENCIES
REVENUES
PUBLIC DEBT DATA
FISCAL POLICY
BONDS
LOAN
CREDITWORTHINESS
LOAN AGREEMENT
BORROWERS
PUBLIC BORROWING
DEBT DATA
BOND YIELDS
SOVEREIGN DEFAULT
BUDGETING
RESERVE
INFLATION
INTERNATIONAL BANK
PENSION
CREDITOR
DEVELOPING COUNTRY
INSTRUMENTS
BUDGET
FISCAL POLICIES
CREDIT RATINGS
EXCHANGE COMMISSION
CURRENCY
MORAL HAZARD
RESERVE BANK
BOND YIELD
FINANCES
DEBT OUTSTANDING
MONETARY FUND
SOVEREIGN BOND
EMERGING MARKET
FINANCIAL INSTITUTIONS
DEBT
MARKETS
SOVEREIGN RATING
DEFICITS
BUDGET DEFICIT
BUSINESS CYCLE
LENDERS
BUDGET DEFICITS
BORROWING COSTS
GROSS DOMESTIC PRODUCT
PENSION FUNDS
FINANCE
FOREIGN CURRENCY
INTERNATIONAL FINANCIAL INSTITUTIONS
TAXES
ACCESS TO INFORMATION
FISCAL DEFICIT
EXPENDITURE
INVESTORS
SOVEREIGN RATINGS
SOVEREIGN DEBT
FEDERAL RESERVE
ELECTIONS
INTEREST PAYMENTS
GOOD
FEDERAL RESERVE BANK
PRINCIPAL PAYMENTS
GLOBAL MARKET
TRANSPARENCY
SOVEREIGN RISK
ACCESS TO CAPITAL
FINANCIAL CRISIS
TURNOVER
FUTURE
NATIONAL DEBT
FOREIGN INVESTMENT
GOVERNMENT REVENUE
EXPENDITURES
PAYMENT OF INTEREST
PROPERTY
PROPERTIES
FOREIGN BANKS
DEFAULT
MARKET
CREDIT RATING
MARKET RISK
RISK OF DEFAULT
SECURITIES
PUBLIC DEBT
SOLVENCY
INSURANCE
BUSINESS CYCLES
CURRENCIES
GOVERNMENT DEBT
ECONOMIC DEVELOPMENT
INTERESTS
GOODS
INVESTOR
SECURITIES EXCHANGE
FINANCIAL MARKET
SOVEREIGN LIABILITIES
INVESTMENT
BOND
SOVEREIGN BONDS
SHARE
PUBLIC FINANCES
POVERTY
FINANCIAL MARKETS
REVENUE
BONDHOLDERS
PROFIT
LENDING
DEBT OFFERINGS
CHECK
EXCHANGE RATE
FISCAL DISCIPLINE
INSTRUMENT
LOCAL CURRENCIES
LIABILITIES
ELECTION
FINANCIAL OPENNESS
DEVELOPMENT BANK
Hanusch, Marek
Vaaler, Paul
Credit Ratings and Fiscal Responsibility
relation MFM Discussion Paper,No. 4;
description The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fiscal expansions are heightened. The literature on political budget cycles documents the tendency for budget deficits to increase in election years as governments attempt to appear economically competent by strategically providing additional publicly financed goods or services, or by cutting taxes. A rating downgrade, however, signals the opposite of competence as it implies an increase in the probability of sovereign default. Since credit ratings are widely observed - by financial markets as well as voters - they in effect serve as a disciplining device for fiscal policy not to submit to short-term spending pressures, thus keeping it responsible. The authors find that: (1) governments going into an election year immediately after a rating downgrade are 27 percentage points more likely to lose at the polls; and (2) governments going into an election year with a negative rating outlook (indicating a higher likelihood of a near-term downgrade) run smaller budget deficits compared to cases with positive or stable outlooks. Ratings act like fiscal rules disciplining governments when they are more vulnerable to political pressures on the budget - as opposed to fiscal policies supporting longer-term economic growth and development objectives.
format Working Paper
author Hanusch, Marek
Vaaler, Paul
author_facet Hanusch, Marek
Vaaler, Paul
author_sort Hanusch, Marek
title Credit Ratings and Fiscal Responsibility
title_short Credit Ratings and Fiscal Responsibility
title_full Credit Ratings and Fiscal Responsibility
title_fullStr Credit Ratings and Fiscal Responsibility
title_full_unstemmed Credit Ratings and Fiscal Responsibility
title_sort credit ratings and fiscal responsibility
publishDate 2015
url http://documents.worldbank.org/curated/en/2015/06/24677886/credit-rating-fiscal-responsibility
http://hdl.handle.net/10986/22363
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