Sovereign Credit Ratings Before and After Financial Crises

Abstract

Sovereign credit ratings play a crucial role in determining the terms and the extent to which countries have access to international capital markets. Some studies have found that changes in credit ratings have a significant impact on sovereign bond yield spreads.1 Sovereign credit ratings are supposed to serve as a summary measure of a country's likelihood of default. Upon a casual inspection of the sovereign credit ratings of a cross-section of countries, it is therefore not surprising to find that the countries with the lowest ratings are those that are unable to borrow from the international capital market altogether and depend on official loans from multilateral institutions or from individual governments. The sovereign rating also influences the terms at which the private sector can borrow from international sources.