The Ghost of a Rating Downgrade : What happens to Borrowing Costs When a Government Loses its Investment Grade Credit Rating?
Since the global financial crisis and the end of the commodity super-cycle, weak growth and countercyclical fiscal policy have contributed to deteriorating public finances in many countries across the globe. As public debt burdens rose, credit rati...
| Main Authors: | , , , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/07/26549943/ghost-rating-downgrade-happens-borrowing-costs-government-loses-investment-grade-credit-rating http://hdl.handle.net/10986/24672 |
| Summary: | Since the global financial crisis and
the end of the commodity super-cycle, weak growth and
countercyclical fiscal policy have contributed to
deteriorating public finances in many countries across the
globe. As public debt burdens rose, credit ratings
deteriorated and a number of countries have been downgraded
from investment to sub-investment ('junk') grade.
Rating downgrades continue to haunt countries in a world of
low growth. This paper examines the effect of such
downgrades on short-term government borrowing costs, using a
sample of 20 countries between 1998 and 2015. The analysis
suggests that a downgrade to sub-investment grade by one
major rating agency increased Treasury bill yields by 138
basis points on average. Should a second rater follow suit,
Treasury bill rates increase by another 56 basis points
(although this effect is not statistically significant). The
analysis does not detect any equivalent impacts for local
currency ratings, even though T-bills tend to be issued in
domestic currency, although this may be due to sample
limitations and is therefore not conclusive. |
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