Skip to main content

The Limits of Sovereign Ratings in Light of the Greek Debt Crisis of 2009–2010

  • Chapter
  • First Online:
  • 1115 Accesses

Abstract

This chapter explains why the CRAs failed to anticipate the Greek debt crisis of 2009–2010 and maintained views that diverged from the market’s during the crisis. Section 10.1 presents a review of the literature. Section 10.2 compares Fitch, Moody’s, and S&P sovereign ratings with credit default swap-implied ratings (CDS-IRs) prior to and during the Greek debt crisis of November 2009 to May 2010. The main finding is that the risk of default reflected in the agencies’ ratings at the end of the financial turmoil (i.e., in mid-May 2010, after the creation of the European stabilization mechanism was announced) was still lower than the risk reflected in the CDS-IRs at the beginning of the crisis (i.e., on 1 January 2010). Section 10.3 offers arguments to explain why CRAs “missed” the crisis. Two types of explanation emerge: first, the belief that an advanced country would not default; second, the use of ratings in regulatory capital standards, which served to inflate investment-grade sovereign ratings. Section 10.4 concludes.

This is a preview of subscription content, log in via an institution.

Buying options

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   79.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   99.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

     The results are reported for Austria (AUT), Belgium (BEL), Finland (FIN), France (FRA), Germany (DEU), Greece (GRC), Ireland (IRL), Italy (ITA), Netherlands (NLD), Portugal (PRT), Spain (ESP), Slovakia (SVK), and Slovenia (SVN). Note that CDSs for Cyprus, Luxembourg, and Malta are not available.

  2. 2.

     Recall that S&P refers to the “Country T&C assessments” (see Chap. 3).

References

  • Bank for International Settlements (2009), “Stocktaking on the use of credit ratings”, Basel Committee on Banking Supervision – The Joint Forum, June.

    Google Scholar 

  • Breger L., Goldberg L. and Cheyette O. (2003), “Market Implied Ratings”, Barra Credit Series, Research Insights.

    Google Scholar 

  • Buiter W. and Rahbari E. (2010), “Is Sovereign Default ‘Unnecessary, Undesirable and Unlikely’ For All Advanced Economies?”, Global Economic View, Citigroup Global Markets, 16 September.

    Google Scholar 

  • Cantor R. and Packer F. (1994), “The Credit Rating Industry”, Federal Reserve Bank of New York Quarterly Review, Summer-Fall.

    Google Scholar 

  • Cottarelli C., Forni L., Gottschalk J. and Paolo M. (2010), “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely”, IMF Staff Position Note, 1st September.

    Google Scholar 

  • Eichengreen B. and Hausmann R. (1999), “Exchange Rates and Financial Fragility”, paper presented at the symposium New Challenges for Monetary Policy, 26–28 August, Jackson Hole, WY.

    Google Scholar 

  • Eichengreen B., Hausmann R. and Panizza U. (2005a), “The Pain of Original Sin”, in Eichengreen B. and Hausmann R. (eds.), Other People’s Money, Chicago University Press, Chicago.

    Google Scholar 

  • Eichengreen B., Hausmann R. and Panizza U. (2005b), “The Mystery of Original Sin”, in Eichengreen B. and Hausmann R. (eds.), Other People’s Money, Chicago University Press, Chicago.

    Google Scholar 

  • Eurostat (2004), Report by Eurostat on the Revision of the Greek Government Deficit and Debt Figures, 22 November.

    Google Scholar 

  • Financial Stability Board (2010), Principles for Reducing Reliance on CRA Ratings, 27 October.

    Google Scholar 

  • Fitch Ratings (2004), “Fitch Downgrades Greece to ‘A’ from ‘A+’”, 16 December.

    Google Scholar 

  • Fitch Ratings (2007a), “Fitch Changes Greece’s Outlook to Positive”, 5 March.

    Google Scholar 

  • Fitch Ratings (2007b), “Fitch CDS Implied Ratings (CDS-IR) Model”, 13 June.

    Google Scholar 

  • Flandreau M., Flores J. H., Gaillard N. and Nieto-Parra S. (2010), “The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815-2007”, in Reichlin L. and West K. (eds), NBER International Seminar on Macroeconomics 2009, NBER and University of Chicago Press, Chicago.

    Google Scholar 

  • Hausmann R. and Panizza U. (2010), “Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millenium”, CID Working Paper No.194, Harvard University.

    Google Scholar 

  • Kou J. and Varotto S. (2008), “Timeliness of Spread Implied Ratings”, European Financial Management, Vol.18, Issue 3.

    Google Scholar 

  • Moody’s Investors Service (2003), “Measuring the Performance of Corporate Bond Ratings”, April.

    Google Scholar 

  • Moody’s Investors Service (2007a), “Moody’s Changes Outlook on Greece’s A1 Bond Ratings to Positive”, 11 January.

    Google Scholar 

  • Moody’s Investors Service (2007b), “Moody’s Market Implied Ratings – Description, Methodology, and Analytical Applications”, December.

    Google Scholar 

  • Partnoy F. (2002), “The Paradox of Credit Ratings” in Ratings, Rating Agencies and the Global Financial System, edited by Levich R., Majnoni G. and Reinhart C., Kluwer, Boston.

    Google Scholar 

  • Partnoy F. (2009), “Historical Perspectives on the Financial Crisis: Ivar Kreuger, the Credit-Rating Agencies, and Two Theories About the Function, and Dysfunction, of Markets”, Yale Journal on Regulation, Vol.26.

    Google Scholar 

  • Qian R., Reinhart C. and Rogoff K. (2011), “On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?”, in Acemoglu D. and Woodford M. (eds), NBER Macroconomics Annual 2010, NBER and University of Chicago Press, Chicago.

    Google Scholar 

  • Reinhart C. and Rogoff K. (2009), This Time is Different, Princeton University Press, Princeton.

    Google Scholar 

  • Reinhart C., Rogoff K. and Savastano M. (2003) “Debt Intolerance”, Brookings Papers on Economic Activity, Vol.34 (1).

    Google Scholar 

  • Sibert A. (2010), “The EFSM and the EFSF: Now and What Follows”, Directorate General for Internal Policies, 8 September.

    Google Scholar 

  • Standard & Poor’s (2004), “Greece Outlook Revised to Negative as Public Finances Crisis Deepens; Ratings Affirmed”, 13 September.

    Google Scholar 

  • Standard & Poor’s (2007), “Hellenic Republic”, 6 March.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Norbert Gaillard .

Rights and permissions

Reprints and permissions

Copyright information

© 2012 Springer Science+Business Media, LLC

About this chapter

Cite this chapter

Gaillard, N. (2012). The Limits of Sovereign Ratings in Light of the Greek Debt Crisis of 2009–2010. In: A Century of Sovereign Ratings. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0523-8_10

Download citation

Publish with us

Policies and ethics