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Structural factors, global shocks and sovereign debt credit ratings

Abstract:

We analyse the role of fundamentals that reflect the sovereigns’ solvency (structural factors) and global shocks as determinants of sovereign debt credit ratings. By means of random effects ordered probit estimations, we show that structural features have short- and long-run effects that are robust to alternative specifications. The low variation of the structural variables and the world’s economic cycle captured by global shocks are key to obtain a higher proportion of correctly predicted downgrades and fewer mismatches between the estimated rating scale and the data. This also reduces the wrongly predicted upgrades to Investment Grade Status.