Rating agencies, self-fulfilling prophecy and multiple equilibria? : An empirical model of the European sovereign debt crisis 2009-2011

Item Type Monograph (Discussion Paper)
Abstract

We explore whether experiences during Europe's sovereign debt crisis support the notion that governments faced scenarios of self-fulfilling prophecy and multiple equilibria. To this end, we provide estimates of the effect of interest rates and other macroeconomic variables on sovereign debt ratings, and estimates of how ratings bear on interest rates. We detect a nonlinear effect of ratings on interest rates which is strong enough to generate multiple equilibria. The good equilibrium is stable, ratings are excellent and interest rates are low. A second unstable equilibrium marks a threshold beyond which the country falls into an insolvency trap from which it may only escape by exogenous intervention. Coefficient estimates suggest that countries should stay well within the A section of the rating scale in order to remain reasonably safe from being driven into eventual default.

[http://ideas.repec.org/p/usg/econwp/201215.html Volltext herunterladen]

Authors Gärtner, Manfred & Griesbach, Björn
Projects Griesbach, Björn; Jung, Florian; Mennillo, Giulia & Gärtner, Manfred (2010) The role of rating agencies in the Eurozone sovereign debt crisis [applied research project]
Language English
Keywords Eurozone, crisis, sovereign debt, credit spreads, bond yields, rating agencies, multiple equilibria, self-fulfilling prophecy.
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Economic Policy
Refereed No
Date 15 June 2012
Publisher School of Economics and Political Science
Series Name Economics Working Paper Series
Number 2012-15
Page Range 33
Depositing User Prof. em. Manfred Gärtner
Date Deposited 01 Aug 2012 07:08
Last Modified 01 Aug 2012 07:15
URI: https://www.alexandria.unisg.ch/publications/215518

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Citation

Gärtner, Manfred & Griesbach, Björn: Rating agencies, self-fulfilling prophecy and multiple equilibria? : An empirical model of the European sovereign debt crisis 2009-2011. Economics Working Paper Series, Nr. 2012-15 : School of Economics and Political Science, 2012, S. 33.

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https://www.alexandria.unisg.ch/id/eprint/215518
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