THE EURO SOVEREIGN DEBT CRISIS DETERMINANTS OF DEFAULT PROBABILITIES AND IMPLIED RATINGS IN THE CREDIT DEFAULT SWAPS MARKET AN ECONOMETRIC ANALYSIS

Carlos Santos ()

Journal of Advanced Studies in Finance, 2011, vol. 2, issue 1, 53-68

Abstract: In this paper we investigate what has been leading investors to ask for higher yields on sovereign debt from certain Euro countries We dismiss Granger Causality as a basis to define speculation Instead we assume that speculative behavior would only exist if market assessments were unrelated to economic fundamentals Using a cross section of countries we improve on the literature on Credit Default Swap Markets on sovereign debt Firstly we use an ordered probit to determine whether fundamentals are driving ratings Then quantile regression determines which variables matter at different conditional quantiles of the default probability Finally Fisher s Z statistic is used to relate bond yields to domestic savings The different methods support the conclusion that the domestic savings rate is lenders main concern Economies with worse saving habits are penalized both in the CDS and in the bonds market Notwithstanding for countries on the top quantiles of the default probabilities public and external debt also increase the insurance premium in the derivatives market Looking at the Portuguese case it is clear that policies that don t take savings into account shall fail as the country had the lowest net savings rate in the EU27 in 2008 followed closely by Greece

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:srs:jasf00:v:2:y:2011:i:1:p:53-68

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