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Which factors determine sovereign credit ratings?

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  • Constantin Mellios
  • Eric Paget-Blanc

Abstract

The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody's and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International's Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country.

Suggested Citation

  • Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 361-377.
    • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:361-377
    DOI: 10.1080/13518470500377406
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    References listed on IDEAS

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