Default, Currency Crises, and Sovereign Credit Ratings

By Carmen M. Reinhart. 2002

428 citations recorded by the source corpus.

Sovereign credit ratings play an important role in determining the terms and the extent to which countries have access to international capital markets. In principle, there is no reason why changes in sovereign credit ratings should be expected to systematically predict a currency crisis. In practice, however, in developing countries there is a strong link between currency crises and default. About 85 percent of all the defaults in the sample are linked with currency crises. The results presented here suggest that sovereign credit ratings systematically fail to anticipate currency crises--but do considerably better predicting defaults. Downgrades usually follow the currency crisis--possibly highlighting how currency instability increases default risk.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/163d7348cd9e212b037c2da2870f8e50d9fa2e83

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Citations in the corpus

An introduction to recent research on credit ratings (2004, background): “Previous literature (Reinhart, 2002) has focused on whether or not credit ratings are good predictors of currency crises.”
Crisis and Competition in Expert Organizational Decision Making: Credit-Rating Agencies and Their Response to Turbulence in Emerging Economies (2004, background): “Researchers (Radelet and Sachs 1998; Reinhart 2001, 2002; Afonso 2003), industry practitioners (Huhne 1998), and policy analysts (Haque et al. 1997) generally date the beginning of turbulence in emerging-market countries to mid-1997, when financial crises hit Thailand, followed by other Asian…”
Do Leverage, Dividend Payout, and Ownership Concentration Influence Firms' Value Creation? An Analysis of Brazilian Firms (2010, background): “Debt financing is a dominant factor in output and investment decisions, at both the firm and country level, in some emerging countries (Abor and Biekpe 2007; Erol 2004; Reinhart 2002).”
A Model of the Twin Ds: Optimal Default and Devaluation (2015, neutral): “Hence the Twin Ds phenomenon identiﬁed in Reinhart (2002) emerges endogenously as the optimal outcome.”
Financial Integration and International Risk Sharing (2006, neutral): “Reinhart et al. (2003) found that the average external debt-to-GNP ratio in the initial year of default is 70.”
Effects of Financial Globalization on Developing Countries: Some Empirical Evidence (2003, background): “Kaminsky and Reinhart (2002) present more direct evidence on the procyclical behavior of capital inflows.29 27 For the financial integration measure used in this paper, the threshold occurs at a ratio of about 50 percent of GDP.”
In sickness and in debt: The COVID-19 impact on sovereign credit risk (2020, neutral): “Since sovereign credit risk is intimately connected to a country’s financial risk ( Acharya et al., 2014 ) and currency depreciation ( Reinhart, 2002; Na et al., 2018; Augustin et al., 2020 ), we obtain the return for each country’s major stock index and exchange rate from Capital IQ.”
Global Factors and Emerging Market Spreads (2006, neutral): “In addition, studies of the determinants of currency crises finds no significant link between recent changes in credit ratings and crisis propensity (Reinhart, 2002), confirming the sus picion that ratings fail to anticipate developments in the country's solvency with a reasonable lag.”