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• W36050503 abstract "Market sentiment has a strong and sustained influence on international capital flows. The change of risk appetite on the part of international investors explains more than half of the variation of the interest rate differential between domestic government bonds and those of a safe-haven reference country. In such an environment, downgradings of country ratings may have a destabilising effect. Yet, an investigation into the changes of ratings for four countries at the European periphery for the period from 1994 to 2011 shows no evidence for a vicious circle of rising interest rates, downgradings and sovereign debt increase. The author is thankful to Gunther Tichy and Franz R. Hahn for useful and constructive comments. The data were processed and analysed with the assistance of Ursula GlauningerE-mail adresses: Thomas.Url@wifo.ac.at, Ursula.Glauninger@wifo.ac.at Rating agencies are currently the target of heavy criticism. Their judgement of cer- tain countries' poor creditworthiness is seen as the cause of rising financing cost of government debt. Particularly heated is the debate about the downgrading of sev- eral euro area countries in the course of the sovereign debt crisis. Such downgrades have taken place since March 2010, largely in parallel with a widening interest rate differential of the respective government bonds vis-a-vis the German Bund bench- mark (Tichy, 2011). The European Commission even threatens to forbid the agencies in critical situations to publish their country ratings. From many sides there is also the call for the creation of a European Rating Agency with the aim to confront the An- glo-Saxon-dominated agencies with an independent European opinion. Against this background, a factual analysis of the connection between changes in the interest rate differential and a country rating is considered appropriate. The starting point of such an analysis is the widening interest rate gap for several euro area countries vis- a-vis Germany. Unlike in the period before the start of the European Economic and Monetary Union (EMU), this gap can no longer be explained by different expecta- tions about future inflation, but has other reasons. Before entry into Monetary Union, the EU countries were able to use two economic policy instruments that are now no longer at their disposal: (1) an independent monetary policy with an own national currency allows the inflation rate to differ from the one abroad as well as (2) the adjustment of the exchange rate to changes in the international competitiveness that unavoidably arise from an inflation differential vis-a-vis the trading partners. With an unexpected bout of inflation, the real value of fixed-interest-rate government bonds diminishes, thereby facilitating a smooth debt reduction. What is important is the surprise element, since expected high inflation rates will already be reflected in current government bond yields. This relation is illus- trated by the Fisher equation (Fisher, 1906) which splits the nominal interest rate in period t, t i , into a real interest rate t r , and the expected inflation rate e t" @default.
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• W36050503 date "2012-05-01" @default.
• W36050503 modified "2023-09-26" @default.
• W36050503 title "Rating Agencies: Creating, Amplifying or Drawn by Events in the Sovereign Debt Crisis?" @default.
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