Determinants of sub-sovereign government ratings in Europe

Abstract

The aim of this paper is to identify the determinants of the rating assigned to sub-sovereign entities in Germany, Austria, Belgium, France, Italy and Spain, using a total of 92 territorial entities for the 1989-2012 period. Multinomial ordered probit estimation models were estimated for each specification and agency. We conclude that the country’s rating is one of the most important determinants of regional government’s ratings with a positive infl uence (as expected), and that the country debt/GDP ratio is a stronger determinant for regions than their own indebtedness with a negative sign. Other relevant variables are population growth rate, unemployment rate, elderly people weight, regional public expenditure weight and size. Additionally, economic variables, such as country’s rating and population growth are more important to Fitch; whereas budget variables and size variables are more relevant to Moody’s. Debt variables and elderly people ratio are more important to S&P.