THE WORLD BANK ECONOMIC REVIEW, VOL. 16, NO. 2, 151-170
© 2002 International Bank for Reconstruction and Development / The World Bank
Financial Crises, Credit Ratings, and Bank Failures |
Default, Currency Crises, and Sovereign Credit Ratings
Carmen M. Reinhart is Professor of Economics at the University of Maryland, on leave at the International Monetary Fund. Her e-mail address is creinhart{at}imf.org.
Abstract
Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically predict currency crises. In practice, in emerging market economies there is a strong link between currency crises and default. Hence if credit ratings are forward-looking and currency crises in emerging market economies are linked to defaults, it follows that downgrades in credit ratings should systematically precede currency crises. This article presents results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults. Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.
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