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Sovereign Credit Risk

In: Public Credit Rating Agencies

Author

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  • Susan K. Schroeder

Abstract

Credit rating agencies perform an important service to capital markets by collecting and disseminating information about the (relative) credit quality of potential borrowers and risks associated with their debt instruments. They facilitate the creation of liquidity, an important feature of corporate and sovereign bond markets. Recent criticisms of the credit rating agencies have focused on their evaluations of asset-backed securities. The sovereign debt crisis (2008–2012) illustrates how the rating industry can influence financial market stability through changes to ratings on sovereign debt. Iceland was downgraded in 2008; Greece, Ireland, and Portugal in 2009; Spain and Italy in 2010 and 2011, respectively; and, the United States in 2011. In early 2012, Standard & Poor’s further downgraded the sovereign debt of Portugal, Italy, Spain, France, and Greece. Not all of these sovereigns exhibited weak fiscal positions prior to their downgrades, although most carried sizeable debt-to-GDP ratios. The pressure of propping up both flagging economies and/or banking sectors threw fiscal positions, strong or weak, of these governments into unhealthy territories, according to EMU guidelines, the rating agencies, and the IMF.

Suggested Citation

  • Susan K. Schroeder, 2015. "Sovereign Credit Risk," Palgrave Macmillan Books, in: Public Credit Rating Agencies, chapter 4, pages 73-104, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-35911-7_4
    DOI: 10.1057/9781137359117_4
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