امتیاز موسسات رتبه بندی: پیش بینی بحران ارز یا بحران بدهی؟

We revisit the question whether sovereign ratings predict financial crises. In line with previous studies, we find that ratings do not predict currency crises and are instead downgraded ex-post. However, the likelihood of currency crisis and the implied probability of sovereign default are not closely linked in emerging markets post-1994. When debt crises are defined as sovereign distress – when spreads are higher than 1000 basis points or 10 percentage points – we find that access to international capital markets is reduced by half. In addition, although sovereign distress events last for typically 5.2 consecutive months, they can persist for longer periods up to nine quarters. Finally, lagged ratings and ratings changes, including negative outlooks and credit watches, are useful in anticipating sovereign distress.

Do sovereign ratings predict financial crises? A number of studies have addressed this question in the wake of numerous financial crises that took place since the 1980s in emerging markets. The main finding is that sovereign ratings fail to anticipate banking and currency crises and are instead adjusted ex-post ((Goldstein, Kaminsky, and Reinhart (GKR), 2000; IMF, 1999; Radelet and Sachs, 1998; Reinhart, 2002). These studies also discuss a number of reasons why ratings should or should not predict financial crises. One argument in explaining the poor performance of sovereign ratings in predicting financial crises is that rating agencies may not have timely, accurate, and comprehensive information on the borrower’s creditworthiness. For instance, GKR (2000) note the problems in obtaining information on Thailand’s commitments in the forward markets, Korea’s estimates of net usable reserves, and the size of external foreign currency-denominated debt of Indonesian corporations, as well as measures of non-performing loans in all three of these countries prior to the Asian crisis. A second line of reasoning is that ratings do not predict crises because of the “moral-hazard play.” If rating agencies expect implicit guarantees from the international official sector, then ratings would incorporate the perceived reduction in risk associated with official support. For instance, GKR (2000) argue that expectations of implicit guarantees from the international community seems to have been a factor in Mexico in 1994–1995 and in Russia and Ukraine in 1998. A third argument is that rating agencies may not have enough incentives to downgrade sovereign ratings before a crisis occurs because they receive fees from the sovereign borrowers they rate and because such downgrades can precipitate a crisis. As a consequence, rating changes are lagging indicators of crises. The main line of defense given by rating agencies is that ratings are meant to provide an assessment of the likelihood of default, not the likelihood of currency crisis. For instance Standard & Poor’s (S&P) defines an issuer credit rating as a current opinion of an obligor’s overall financial capacity (its creditworthiness) to pay its financial obligations. Similarly, Moody’s defines a foreign currency issuer ratings as opinions of the ability of entities to honor senior unsecured financial obligations and contracts denominated in foreign currency. One counterargument to this main line of defense, however, is that currency crises and debt crises may be linked. For instance, a number of studies, including GKR, have found that currency crises are followed by downgrades. Based on this observation, Reinhart (2002) suggests that currency crises do affect the probability of default and that it is critical to assess how well sovereign credit ratings predict both currency crises and default. Using data from 1979 to 1999, Reinhart (2002) finds that ratings fail to anticipate currency crises but do better predicting defaults. The literature on early-warning systems for financial crises has so far paid little attention to the role of rating agencies in assessing the probability of sovereign default. In fact, the prediction of currency crises is a different exercise from the forecasting of sovereign defaults. In addition, episodes of major turbulence in currency markets in the mid-1990s, rather than defaults, were the main catalyst for this literature. Last but not least, default events especially in the 1990s are much more scarce than currency crisis events. Studies on currency crises have, nevertheless, found that currency crises and debt crises are closely linked in emerging market economies. For instance, GKR (2000) and IMF (2001) conclude that currency crises in developing countries are not decoupled from sovereign debt crises. A closer look at previous studies, including Reinhart (2002), shows, however, that most debt crises considered occurred in the 1980s and are related to problems with bank debt. One central motivation of this paper is to differentiate between currency and external debt crises when assessing rating agencies’ ability to predict financial crises. In this regard, we revisit the question whether sovereign ratings are useful in forecasting both types of crises in the 1990s. Another contribution of this paper is its use of information from the bond market to capture episodes of external debt servicing difficulties unlike conventional definitions of debt crises. Indeed, in contrast to the frequent episodes of defaults on bank loans in the 1980s, the 1990s coincide with a period with large but very few sovereign defaults which limits the usefulness of standard definitions of debt crises. We follow GKR (2000) and estimate a family of probit models to assess the predictive ability of sovereign ratings in anticipating currency crises as well as debt crises occurring from 1994 onward. As in previous studies of sovereign ratings and currency crises, we find that ratings do not predict currency crises but are instead adjusted after the fact. However, unlike previous studies, we do not find that currency crises are closely linked to the risk of debt crises when the 1994–2002 period is considered. Although GKR (2000), IMF (2001), and Reinhart (2002) find that currency crises are linked to debt crises, their results are based on a relatively small sample of actual defaults, which cluster in the 1980s loan crisis. To overcome these limitations, we use implied probabilities of default from dollar-denominated sovereign bond spreads and estimated probabilities of a currency crisis from a standard early-warning system model. We find that while the two are indeed often associated, the risk of debt crisis (variously measured) is generally distinct from the risk of currency crisis (either measured as actual incidence of crisis or from an early-warning-system model). Indeed, ratings and spreads are not closely related to currency crises, and since both are plausible proxies for default risk, this in turn does not seem closely related to the risk of a currency crisis. The correlation between the probability of a currency and the probability of a sovereign default is 6% and the average risk-neutral implied probability of default during currency crisis is 7.71%, compared with 6.48% for the whole sample and 6.31% for non-crisis periods. Since implied probabilities of default, spreads, as well as ratings all proxy for default itself, our result that defaults are not correlated with currency crises are not surprising in light of the previous studies that find that sovereign ratings and spreads do not predict currency crises. Since currency crises are somewhat decoupled from the probability of default in the post-1994 era, the determinants of ratings may not be the right set of fundamentals when it comes to predicting currency crises. Ratings could, however, prove useful in anticipating debt crises. One problem with debt crises, however, is that there have been very few sovereign defaults on rated debt in the 1994–2002 period (eight defaults by seven countries according to Moody’s (2003)). In this paper, we therefore define debt crises as “sovereign distress,” defined as events occurring when the average spreads on the most liquid sovereign bonds are above 1000 basis points (10percentage points). According to Altman (1998), distressed non-sovereign securities can be defined narrowly as those publicly held and traded debt and equity securities of firms that have defaulted on their debt obligations and/or have filed for protection under Chapter 11 of the US Bankruptcy Code. Under a more comprehensive definition, Altman (1998) considers that distressed securities would include those publicly held debt securities selling at sufficiently discounted prices so as to be yielding, should their issuers not default, a significant premium of a minimum of 10% over comparable US Treasury securities. We find that for a particular sovereign debtor, periods of distress – defined as events of relatively high cost of capital – correspond to episodes when access to international capital markets is reduced by half. Furthermore, at distressed-spreads levels, sustainability issues become more acute as spreads can remain at distressed levels for protracted intervals of one to nine quarters. Finally, using a simple probit estimation, we find that lagged ratings and ratings changes help predict sovereign distress. These results suggest that the set of fundamentals that determine credit ratings is relevant when it comes to assessing and anticipating credit events. The rest of the paper is organized as follows: Section 2 addresses the question whether sovereign ratings predict currency crises while Section 3 studies the behavior of ratings after a currency crisis. Section 4 reviews the limitations of the typical definitions of debt crises while Section 5 studies the relationship between the risk of currency crises and the probability of default. Next, Section 4 suggests the capital market-based concept of debt crisis, that of sovereign distress and studies the ability of ratings to predict distress. Finally, Section 6 concludes with suggestions for future research.

This paper revisits the question whether sovereign credit ratings fail to anticipate financial crises. We find, in line with the literature on early-warning-systems that ratings fail to predict currency crises but are instead downgraded following such crises. We argue, however, that debt crises and the relationship between debt crises and currency crises deserve a closer look since ratings proxy for the likelihood of sovereign default. Given the scarcity of sovereign default data, especially in the 1990s in contrast to the numerous defaults on bank loans in the 1980s, we use information from the sovereign bond market to show that debt crises and currency crises are not closely related to in the period from 1994 to 2002. We find that from 1994 onward, the probability of a currency crisis and the risk-neutral implied probability of default from bond spreads exhibit a correlation of 6%. This result suggests that further studies of the macroeconomic fundamentals that determine the probabilities of currency and debt crises could be helpful to both market participants and policymakers. Using probit estimations, we find that although ratings do not anticipate currency crises well, they do have some ability to predict debt crises, defined as distressed debt events. Given the limited number of sovereign defaults from 1994 onward and the short history of sovereign ratings in emerging markets, we propose to define debt crises as distressed debt events – that is, events where sovereign bond spreads exceed 1000 basis points. Using this definition, which coincides with periods of drastically reduced market access, we find that lagged ratings and ratings changes, including negative credit watches and outlooks, help predict the likelihood of distress in the next year. A closer look at distressed debt events show that sovereign distress seems to be more associated with long duration and high-intensity events, since most countries with distressed spreads typically experience high level of interest rates on their external debt for more than two quarters. This result suggests that the concept of sovereign distress could be useful for studies on the distinction between liquidity and solvency crises or for studies of the cost of financial crises. One limitation of measures based on emerging market bond spreads is that the data start only in the early 1990s. It is possible, however, to combine different measures of debt crises to obtain longer series, and since earlier data refer more to bank loan debt rather than bonded debt, combining bank-based and bond market-based proxies of external debt vulnerabilities may prove useful.