Sovereign credit ratings and CDS spreads in Emerging Europe

Abstract

Research background: Sovereign credit ratings play an important role in determining any country’s access to the international debt market. During the global financial crisis and the European debt crisis, credit rating agencies were harshly criticized for the timing of their announcements regarding ratings downgrades and the ranges of those downgrades. Therefore, it is worth considering whether the sovereign credit rating is still a useful benchmark for investors.
 Purpose of the article: This article examines whether credit rating agencies still provide financial markets with new information about the solvency of governments in Emerging Europe countries. In addition, it describes the differences in the effect of particular types of rating events on financial markets and the impact of individual agencies on the market situation. Our study also focuses on evaluating these occurrences at different stages of the business cycle.
 Methods: This article uses data about ratings events that took place between 2008 and 2018 in 17 Emerging Europe economies. We took into consideration positive, neutral, and negative events related to ratings changes and the outlooks reported by Fitch Ratings, Moody’s, and Standard & Poor’s. We used a methodology based on event studies. In addition, we performed Wilcoxon signed-ranks test and used a logit model to determine the usefulness of cumulative adjusted credit default swap (CDS) spread changes in predicting the direction of ratings changes.
 Findings & Value added: Our research provides evidence that the CDS market reflects information regarding government issuers up to three months before ratings downgrades are announced. Information reported to the market by ratings agencies is only relevant in the short timeframe surrounding ratings downgrades and upgrades. However, positive credit rating changes convey more information to the market. We also found strong evidence that, in the post-crisis period, credit ratings provide markets with less information.

Sovereign Credit Ratings in „New“ EU Member States – A Comparative Analysis in Times of Crisis and Tranquility

“…Determinants of sovereign credit ratings have been studied in a number of papers despite regularly published reports in which CRAs identify factors taken into consideration. This is due to the fact that the weights ascribed to those factors are not revealed (Dopierała, Ilczuk and Wojciechowski, 2020). Moreover, the final decisions on credit ratings might differ from what is implied by qualitative and quantitative analyses as they are subject to judgmental adjustments of credit rating committees (De Moor et al, 2018).…”