Credit rating agency downgrades and the Eurozone sovereign debt crises

Christopher Baum, Dorothea Schäfer and Andreas Stephan

Journal of Financial Stability, 2016, vol. 24, issue C, 117-131

Abstract: This paper studies the reaction of the Euro's value against major currencies to sovereign rating announcements from Moody's, S&P and Fitch CRAs during the Eurozone debt crisis in 2010–2012 based on event study methodology combined with GARCH models. We also analyze how the yields of French, Italian, German and Spanish government long-term bonds were affected by CRA announcements. Our results reveal that CRA downgrades, watchlist and outlook announcements had no impact on the value of the Euro currency but increased exchange rate volatility. At the same time, downgrades as well as negative outlook announcements increased the yields of French, Italian, and Spanish bonds and even affected the German bond's yields. This shows that the monetary union has led to a breakdown of the consequences of the rating shocks between currency value and sovereign bond yields. The reason is that part of the rating shock is absorbed by an internal repricing of sovereign bonds.

Keywords: Credit rating agencies; Euro crisis; Sovereign debt; Euro exchange rate (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 F31 F42 F65 G01 G12 G14 G24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (2014)
Working Paper: Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (2014)
Working Paper: Credit rating agency downgrades and the Eurozone sovereign debt crises (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:24:y:2016:i:c:p:117-131

DOI: 10.1016/j.jfs.2016.05.001

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