Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises?
IMF Working Papers, June 1, 2003
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- Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises?
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Bibliographic details
- Authors: Amadou N Sy
- Published: June 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451854510.001
Main findings
- Currency and debt crises are not closely linked in emerging markets, in contrast to the early-warning system literature.
- After 1994, credit ratings predict debt crises but fail to anticipate currency crises.
- When debt crises are defined as sovereign distress—when spreads are higher than 1,000 basis points—countries experience reduced capital market access and high interest rates on their external debt for typically more than two quarters.
- Lagged ratings and ratings changes, including negative outlooks and credit watches, anticipate such debt crises.
Definitions and key metrics used
- Debt crisis (sovereign distress) definition: spreads are higher than 1,000 basis points.
- Typical duration of market access reduction and high external debt interest rates: more than two quarters.
- Temporal break noted in predictive performance: after 1994.
Role of credit ratings and ratings changes
- Credit ratings have predictive power for debt crises (post-1994).
- Credit ratings fail to anticipate currency crises (post-1994).
- Ratings signals that anticipate debt distress include:
- Lagged ratings.
- Ratings changes.
- Negative outlooks.
- Credit watches.
Implications for market access and external financing
- Sovereign distress (spreads > 1,000 basis points) is associated with:
- Reduced capital market access.
- High interest rates on external debt.
- The impaired access and elevated rates typically persist for more than two quarters following such distress.
Content in this bundle
- Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises? - WP/03/122