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Sovereign Ratings in the Post-Crisis World : An Analysis of Actual, Shadow and Relative Risk Ratings

ACCOUNTING ADVANCED ECONOMIES BANK POLICY BANKS BENCHMARK BENCHMARKS BOND RATINGS BOND YIELDS BORROWING COSTS CAPITAL ACCOUNT CAPITAL ACCOUNT LIBERALIZATION CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MOBILITY CDS CONFLICT OF INTEREST CORPORATE FINANCE COUNTRY RISK CREDIT DEFAULT CREDIT DEFAULT SWAPS CREDIT QUALITY CREDIT RATING CREDIT RATING AGENCIES CREDIT RATINGS CREDIT RISK CREDITWORTHINESS CURRENCY CURRENCY CRISES CYCLICAL FACTORS DATA AVAILABILITY DEBT DEBT CRISIS DEBT RATINGS DEBT RATIO DEBT RELIEF DEBT STOCKS DEFAULT RISK DEFAULTS DEPENDENT VARIABLE DEVELOPING COUNTRIES DEVELOPING ECONOMIES DEVELOPMENT ECONOMICS DEVELOPMENT FINANCE DEVELOPMENT POLICY DEVELOPMENT PROJECTS DOMESTIC FINANCIAL SECTOR ECONOMETRIC ANALYSIS ECONOMETRIC MODEL ECONOMIC CIRCUMSTANCES ECONOMIC DEVELOPMENT ECONOMIC OUTLOOK ECONOMIC PERFORMANCE ECONOMIC POLICY ECONOMIC STABILITY ECONOMIC STRENGTH EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EXCHANGE RATE EXCHANGE RATES EXPLANATORY VARIABLES EXPORTS EXTERNAL DEBT FEDERAL RESERVE FEDERAL RESERVE BANK FEDERAL RESERVE BANK OF NEW YORK FINANCIAL ANALYSIS FINANCIAL CRISIS FINANCIAL INTERMEDIARY FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SECTOR DEVELOPMENT FINANCIAL STABILITY FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FUTURE RESEARCH GDP GLOBAL CAPITAL GLOBAL CAPITAL MARKETS GLOBAL FINANCE GOLD GOVERNANCE INDICATORS GOVERNMENT BOND GOVERNMENT BOND YIELD GOVERNMENT DEBT GROSS DEBT GROSS NATIONAL INCOME GROWTH RATE HIGH-INCOME COUNTRIES IMPORT IMPORTS INCOME INDEBTEDNESS INDEX NUMBERS INFLATION INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL DEBT INTERNATIONAL DEBT SECURITIES INTERNATIONAL MONEY INTERNATIONAL SETTLEMENTS INVESTMENT FLOWS LESS DEVELOPED COUNTRIES LIQUIDITY LOCAL CURRENCY MACRO-STABILITY MACROECONOMIC INSTABILITY MARKET INFORMATION MARKET PRICES MATHEMATICAL ECONOMICS MATURITIES MATURITY MIGRATION MISALIGNMENT MONETARY FUND NATIONAL INCOME POLICY CREDIBILITY POLITICAL DISTURBANCES PORTFOLIO POSITIVE EFFECTS POST-CRISIS PERIOD PRIVATE ENTITIES PUBLIC POLICY REMITTANCES REPUTATION RESERVE RESERVES RULE OF LAW SHADOW VALUES SHORT TERM DEBT SHORT-TERM DEBT SHORT-TERM EXTERNAL DEBT SOLVENCY SOVEREIGN BOND SOVEREIGN DEBT SOVEREIGN DEFAULT SOVEREIGN ENTITIES SOVEREIGN RATING SOVEREIGN RATINGS SOVEREIGN RISK STANDARD DEVIATION SUB-NATIONAL ENTITIES SUM OF IMPORTS SUSTAINABLE FINANCE TOTAL EXTERNAL DEBT TOTAL RESERVES TREASURY VOLATILITY WEIGHTS WELFARE ECONOMICS WORLD DEVELOPMENT INDICATORS WORLD ECONOMY YIELD SPREADS
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World Bank, Washington, DC
Africa | East Asia and Pacific | Europe and Central Asia
2014-02-04T16:43:23Z | 2014-02-04T16:43:23Z | 2013-10

This paper analyzes the evolution of sovereign credit ratings in the wake of the global financial crisis by studying changes in actual, shadow, and relative ratings between 2008 and 2012. For countries that do not have a rating from the major rating agencies, shadow ratings are estimated as a function of macroeconomic, structural, and governance variables. The shadow rating exercise confirms earlier findings in the literature that even after the financial crisis, many unrated countries appear to be more creditworthy than previously believed and can access international capital markets. The paper also develops a new rating scale called the "relative risk rating," which ranks countries according to their actual or shadow ratings after controlling for changes in the world weighted average rating. When relative ratings in 2012 are compared with the first half of 2008, the world average rating is found to be weaker because of the financial crisis. The relative rating improved in developing economies such as Azerbaijan, Ethiopia, Kazakhstan, Indonesia, and the Philippines, whereas it deteriorated in crisis-affected high-income countries such as Cyprus, Greece, Spain, Portugal, Ireland, and Egypt. Interestingly, India, Jordan, Poland, and the United Kingdom had their rating outlook downgraded by the rating agencies, but their relative rating actually improved as other countries suffered even worse downgrades. A regression model is used to analyze the relative contributions of different variables to rating changes during 2008-2012, a helpful feature for policy makers interested in improving sovereign ratings.

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