Default, Currency Crises, and Sovereign Credit Ratings |
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Authors: | Reinhart Carmen M |
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Institution: | Carmen M. Reinhart is Professor of Economics at the University of Maryland, on leave at the International Monetary Fund. Her e-mail address is creinhart{at}imf.org. |
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Abstract: | Sovereign credit ratings play an important part in determiningcountries' access to international capital markets and the termsof that access. In principle, there is no reason to expect thatsovereign credit ratings should systematically predict currencycrises. In practice, in emerging market economies there is astrong link between currency crises and default. Hence if creditratings are forward-looking and currency crises in emergingmarket economies are linked to defaults, it follows that downgradesin credit ratings should systematically precede currency crises.This article presents results suggesting that sovereign creditratings systematically fail to predict currency crises but doconsiderably better in predicting defaults. Downgrades in creditratings usually follow currency crises, possibly suggestingthat currency instability increases the risk of default. |
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