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

Manfred Gärtner (), Björn Griesbach and Florian Jung

No 1106, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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.

Keywords: Sovereign debt ratings; sovereign default; debt crisis; budget deficit; rating agencies; PIGS; risk premiums; government bond spreads. (search for similar items in EconPapers)
JEL-codes: F34 G24 H63 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011-03
New Economics Papers: this item is included in nep-eec
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