EconPapers    
Economics at your fingertips  
 

Rating sovereign debt in a monetary union – original sin by transnational governance

Finn Körner and Hans-Michael Trautwein

Journal of Risk Finance, 2015, vol. 16, issue 3, 253-283

Abstract: Purpose - – The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. Design/methodology/approach - – While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times. Findings - – Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010. Practical implications - – The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all. Originality/value - – In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

Keywords: Monetary union; Credit rating agencies; Eurozone debt crisis; Rating methodologies; Sovereign debt; E42; F32; F33; G24; H63 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.emeraldinsight.com/10.1108/JRF-11-2014- ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
Working Paper: Rating Sovereign Debt in a Monetary Union – Original Sin by Transnational Governance (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:v:16:y:2015:i:3:p:253-283

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... /journals.htm?id=jrf

Access Statistics for this article

Journal of Risk Finance is currently edited by Bonnie Buchanan

More articles in Journal of Risk Finance from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

 
Page updated 2023-01-17
Handle: RePEc:eme:jrfpps:v:16:y:2015:i:3:p:253-283