Impact of Credit Events on Sovereign Ratings

Abstract

This article examines the effect of credit events on sovereign ratings. The study uses a balanced annual panel of 70 countries over the period 2013–2020, comprising 560 observations, based on data on sovereign defaults and debt restructurings with private creditors. The treatment variable takes a value of 1 during the post-default debt restructuring period and 0 outside this period. The sovereign rating variable is the average of the ratings assigned by Moody’s, Standard & Poor’s (S&P), and Fitch, converted into numerical scores on a 17-point scale. The estimation relies on the Augmented Inverse Probability Weighting (AIPW) approach, which estimates the average treatment effect under the assumption of conditional independence given observed covariates. The results indicate an average treatment effect of −8.089 points, compared with an estimated mean of 10.934 points in the counterfactual scenario without treatment. These findings suggest a deterioration in sovereign ratings associated with post-default debt restructuring, subject to the model’s identification assumptions. Additional analyses using five-year local projections and accounting for regional and macroeconomic heterogeneity examine the sensitivity of the results. These findings highlight the importance of anticipating the consequences of credit events for sovereign creditworthiness and access to international capital markets.

Classification JEL : G24, G15, C14,C32,  F21, F34, H63

Paper type: Empirical Research