Which factors determine sovereign credit ratings?

Authors: Mellios, Constantin¹; Paget-Blanc, Eric²

Source: The European Journal of Finance, Volume 12, Number 4, June 2006 , pp. 361-377(17)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody's and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International's Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country.

Keywords: Credit ratings; sovereign debts; sovereign default; principal component analysis; logistic model

Document Type: Research article

DOI: http://dx.doi.org/10.1080/13518470500377406

Affiliations: 1: University of Cergy-Pontoise, Cergy-Pontoise, France 2: University of Evry, Evry Cedex, France and Fitch Ratings

Publication date: 2006-06-01

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