Journal of Economics and Finance

, Volume 27, Issue 1, pp 56–74 | Cite as

Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies

  • Antonio Afonso


An analysis of the possible determinants of sovereign credit ratings assigned by the two leading credit rating agencies, Moody's and Standard and Poor's, is conducted in this paper by using linear, logistic, and exponential transformations of the rating scales. Of the large number of variables that can be used, the set of explanatory variables selected in this study is significant in explaining the credit ratings. Namely, six variables appear to be the most relevant to determining a country's credit rating: GDP per capita, external debt, level of economic development, default history, real growth rate, and inflation rate.


Percent Level Credit Rating Rating Level Budget Balance External Debt 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Alesina, A., M. De Broeck, A. Prati, and G. Tabellini. 1992. “Default Risk.”Economic Policy 15: 427–463.CrossRefGoogle Scholar
  2. Altman, E. 1997., “The Importance and Subtlety of Credit Rating Migration.” Mimeo, Stern School of Business, NY University, September.Google Scholar
  3. Bayoumi, T., M. Goldstein, and G. Woglom. 1995. “Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States.”Journal of Money, Credit, and Banking 27: 1046–1059.CrossRefGoogle Scholar
  4. BIS. 2000. “Credit Ratings and Complementary Sources of Credit Quality Information,” Basel Committee on Banking Supervision, Working Papers 3, August, Bank for International Settlements.Google Scholar
  5. Bulow, J. 1992. “Debt and Default: Corporate vs. Sovereign.” InNew Palgrave Dictionary of Money and Finance, edited by P. Newman, M. Milgate, and J. Eatwell. New York: Stockton Press.Google Scholar
  6. Bulow, J., and K. Rogoff. 1989. “Sovereign Debt: Is to Forgive to Forget?.”American Economic Review 79: 43–50.Google Scholar
  7. Cantor, R., and F. Packer. 1996. “Determinants and Impact of Sovereign Credit Ratings.”Federal Reserve Bank of New York Economic Policy Review 2: 37–53.Google Scholar
  8. Catão, L., and B. Sutton. 2002. “Sovereign Defaults: The Role of Volatility.” IMF Working Paper 02/149.Google Scholar
  9. Cosset, J-C., and J. Roy. 1991. “The Determinants of Country Risk Ratings.”Journal of International Business Studies 22: 135–142.CrossRefGoogle Scholar
  10. Eaton, J., M. Gersovitz, and J. Stiglitz. 1986. “The Pure Theory of Country Risk.”European Economic Review 30: 481–513.CrossRefGoogle Scholar
  11. Eaton, J., and R. Fernandez. 1995. “Sovereign Debt.” InHandbook of International Economics, edited by G. Grossman and K. Rogoff. North Holland.Google Scholar
  12. Edwards, S. 1984. “LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976–80.”American Economic Review 74: 726–734.Google Scholar
  13. Haque, N., M. Kumar, N. Mark, and D. Mathieson. 1996. “The Economic Content of Indicators of Developing Country Creditworthiness.”IMF Staff Papers 43: 688–724.Google Scholar
  14. Haque, N., N. Mark, and D. Mathieson. 1998. “The Relative Importance of Political and Economic Variables in Creditworthiness Ratings.” IMF Working Paper 98/46, April.Google Scholar
  15. Holzmann, R., R. Palacios, and A. Zviniene. 2001. “Implicit Pension Debt: Issues, Measurement and Scope in International Perspective.” Mimeo.Google Scholar
  16. Huhne, C. 1998. “How the Rating Agencies Blew It on Korea.”The International Economy, May/June.Google Scholar
  17. IMF. 2001.World Economic Outlook, September.Google Scholar
  18. Kneller, R., M. Bleaney, and N. Gemmell. 1999. “Fiscal Policy and Growth: Evidence from OECD Countries.”Journal of Public Economics 74: 171–190.CrossRefGoogle Scholar
  19. Kunczik, M. 2001. “Globalization: News Media, Images of Nations and the Flow of International Capital with Special Reference to the Role of Rating Agencies.” Deutsches Übersee-Institut, Arbeitspapier (2/2001), February.Google Scholar
  20. Larrain, G., R. Helmut, and J. Maltzan. 1997. “Emerging Market Risk and Sovereign Credit Ratings.” OECD Development Centre, Technical Paper 124, April.Google Scholar
  21. Lee, S. 1993. “Are the Credit Ratings Assigned by Bankers Based on the Willingness of LDC Borrowers to Repay?.”Journal of Development Economics 40: 349–359.CrossRefGoogle Scholar
  22. Moody's. 2001.Moody's Country Credit Statistical Handbook. 1st ed. January (available at Scholar
  23. Moon, C., and J. Stotsky. 1993. “Testing the Differences between the Determinants of Moody's and Standard and Poor's Ratings.”Journal of Applied Econometrics 8: 51–69.CrossRefGoogle Scholar
  24. Obstfeld, M., and K. Rogoff. 1996.Foundations of International Macroeconomics. MIT Press.Google Scholar
  25. Rose, A. 2002. “One Reason Countries Pay Their Debts: Renegotiation and International Trade.” CEPR Discussion Paper 3157, January.Google Scholar

Copyright information

© Academy of Economics and Finance 2002

Authors and Affiliations

  • Antonio Afonso
    • 1
  1. 1.Department of Economics and CISEP, Instituto Superior de Economia e GestãoTechnical University of LisbonLisbonPortugal

Personalised recommendations