Working Paper: CEPR ID: DP9665
Authors: Vito Polito; Michael R. Wickens
Abstract: We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.
Keywords: credit risk; default probability; fiscal policy; sovereign risk
JEL Codes: E62; H30; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal position (H68) | Sovereign credit ratings (F34) |
| Fiscal health (debt-to-GDP ratio) (H68) | Credit ratings (G24) |
| Model-based sovereign credit ratings (F34) | Downgrades for countries (Ireland, Spain, Portugal, UK) (F34) |
| Model downgrades Greece (O52) | Highest default probability (G33) |
| Model-based assessment (C52) | Accurate reflection of creditworthiness (G21) |
| Debt-to-GDP ratio (H68) | Probability of default (G33) |