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

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Kurzfassung 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.

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Typ Diskussionsbeitrag (Englisch)
   
Schlagwörter (Tags) Eurozone, crisis, sovereign debt, credit spreads, bond yields, rating agencies, multiple
equilibria, self-fulfilling prophecy.
   
Projekt The role of rating agencies in the Eurozone sovereign debt crisis
Erscheinungsdatum 15-6-2012
Herausgeber Department of Economics
Beitragsreihe Economics Working Paper Series (2012-15)
Verlag School of Economics and Political Science
Seite(n) 33
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Profilbereich SEPS - Wirtschaftspolitik
Zitation Gärtner, Manfred ; Griesbach, Björn ; Department of Economics (Hrsg.): 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.