This paper examines the joint behaviour of sovereign ratings and their macroeconomic/financial determinants (namely uncertainty, GDP growth, government debt-to-GDP ratio, investment-to-GDP ratio and the fiscal balance-to-GDP ratio) in a multivariate Panel Vector Autoregressive (PVAR) framework. We reveal another channel of interconnection between sovereign and banking credit risk by identifying a two-way relationship between non-performing loans (NPLs) and sovereign ratings. Generalized impulse response functions (GIRFs) provide evidence of significant effects from NPLs on sovereign rating decisions over and above the effects of the remaining economic/financial variables. At the same time, sovereign rating decisions impact on NPLs and all other variables.
We examine the determinants of credit ratings for the Eurozone countries over the period 2002-2013 within a panel framework that allows for cross-sectional dependence. We find that government debt and the cumulative current account exert a stronger impact on ratings post-2008 compared to the period before.
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