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An Introduction

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  • Carmen M. Reinhart

Abstract

This paper has addressed the following questions: Do sovereign credit ratings systematically help predict currency and banking crises? If not, why not? What needs to change? What is the behavior of credit ratings following the crises? Are there important differences in the behavior of credit ratings between developed and emerging markets? The answers revealed by the analysis can be summarized as follows: As to the ability of rating changes to anticipate financial crises, the empirical tests presented here on sovereign credit ratings and financial crises suggest that sovereign credit ratings systematically fail to anticipate banking and currency crises. This result appears to be robust across alternative crises definitions, model specification, and approaches. Only for the Institutional Investor ratings is there some (weak) evidence that downgrades precede currency crises. In none of the cases are banking crises systematically preceded by downgrades. As regards the behavior of ratings after the crisis and differences between developed and emerging markets, there is evidence that sovereign credit ratings tend to be reactive--particularly when it comes to EMs. Both the probability of a downgrade and the magnitude of the downgrade are significantly higher for EMs. Taken together, these findings point to a procyclicality in the ratings. In a related paper (Calvo and Reinhart, 2000), also ask how these differences between developed and emerging markets in access to international capital markets influence the outcomes of a currency crisis--particularly as regards output. They present evidence that EMs are, indeed, very different from developed economies in several key dimensions. In EMs devaluations, or large depreciations for that matter, are contractionary, the adjustments in the current account are far more acute and abrupt. Hence, currency crises become credit crises as sovereign credit ratings often collapse following the currency collapse and access to international
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Suggested Citation

  • Carmen M. Reinhart, 2002. "An Introduction," The World Bank Economic Review, World Bank, vol. 16(2), pages 149-150, August.
    • Handle: RePEc:oup:wbecrv:v:16:y:2002:i:2:p:149-150
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    References listed on IDEAS

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    1. Veronica Balzarotti & Michael Falkenheim & Andrew Powell, 2002. "On the Use of Portfolio Risk Models and Capital Requirements in Emerging Markets: The Case of Argentina," The World Bank Economic Review, World Bank, vol. 16(2), pages 197-212, August.
    2. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," The World Bank Economic Review, World Bank, vol. 16(2), pages 151-170, August.
    3. Thomas R. Atkinson, 1967. "Trends in Corporate Bond Quality," NBER Books, National Bureau of Economic Research, Inc, number atki67-1.
    4. Graciela L. Kaminsky & Richard K. Lyons & Sergio L. Schmukler, 2001. "Mutual Fund Investment in Emerging Markets: An Overview," The World Bank Economic Review, World Bank, vol. 15(2), pages 315-31-340.
    5. W. Braddock Hickman, 1958. "Corporate Bond Quality and Investor Experience," NBER Books, National Bureau of Economic Research, Inc, number hick58-1.
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F30 - International Economics - - International Finance - - - General

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