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PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

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abstract This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.

[http://ideas.repec.org/p/usg/econwp/201106.html#abstract
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type discussion paper (English)
   
keywords Sovereign debt ratings, sovereign default, debt crisis, budget deficit, rating agencies, PIGS, risk premiums, government bond spreads
   
project The role of rating agencies in the Eurozone sovereign debt crisis
date of appearance 28-3-2011
issuing department Department of Economics
series of paper Economics Working Paper Series (1106)
publisher School of Economics and Political Science (University of St. Gallen)
page(s) 20
review not reviewed
   
profile area SEPS - Economic Policy
citation Gärtner, M., Griesbach, B., & Jung, F., Department of Economics (Eds.), (2011). PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies. Economics Working Paper Series, 1106. University of St. Gallen: School of Economics and Political Science.