Sovereign Credit Rating Determinants Under Financial Crises

Abstract

This paper empirically examines the determinants of sovereign credit ratings using panel data of a sample of 86 countries for 1993-2013. It further investigates whether the countries’ average credit rating differs for crisis and non-crisis periods, as well as for the different regions where the countries belong. At last, it examines how the dot-com bubble burst, the Asian crisis and the recent international financial crisis have affected the average rating of each region. The estimation results reveal that a set of macroeconomic, external, government and qualitative factors play an important role on sovereign credit ratings. Moreover, the results provide evidence of differences in the average rating for all geographical regions, except for North America and the Euro Zone. The paper suggests that while the recent international financial crisis had a negative effect on the average rating across all regions, the dot-com bubble burst had no effect on the rating of these regions and the Asian crisis only affected the average rating of Asian countries. Finally, the paper provides evidence that the downgrade on the average rating resulting from the international financial crisis had greater magnitude in the Euro Zone.