Determinants and Impact of Sovereign Credit Ratings - FEDERAL RESERVE BANK of NEW YORK

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Economic Policy Review

Determinants and Impact of Sovereign Credit Ratings

October 1996 Volume 2, Number 2

JEL classification: F34, G15

Authors: Richard Cantor and Frank Packer

The authors conduct the first systematic analysis of the determinants and impact of the sovereign credit ratings assigned by the two leading U.S. agencies, Moody’s Investor Services and Standard and Poor’s. Of the large number of criteria used by the two agencies, six factors appear to play an important role in determining a country’s credit rating: per capita income, GDP growth, inflation, external debt, level of economic development, and default history. In addition, the authors find that sovereign ratings influence market yields—particularly those on non-investment-grade issues—independently of any correlation with publicly available information.

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18 pages / 103 kb

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