Relating sovereign debt ratings to different practices of exchange rate policy: An empirical analysis

• Autor(a) principal: Pinto, Danielson Vicente Fortes Ramos
• Data de Publicação: 2012
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/9001
• topic: Sovereign debt rating; de facto exchange rate regime; Crisis period; Rating scales; Ratings de dívida soberana; Regimes cambiais; Período de crise; Escalas de rating

In this thesis it is developed a research project whose objective is to identify links between the exchange rate policy of a country - fixed, intermediate and floating - and its long-term sovereign external debt, measured by sovereign ratings and assigned by Moody's and the S&P notations agencies, in two different economic periods: 1998-2002 (crisis period) and 2003-2007 (period of global recovery). Based on a cross-section data for 81 countries, with a multivariate linear regression model and making use of three numerical scales for converting the sovereign ratings, namely the linear, the exponential and the logistic, the results show that exchange rate policy of a country largely determines its sovereign rating assigned by rating agencies. The intermediate exchange systems penalizes more the external debt quality indicators, while sovereign rating of a country is very favoured with floating exchange rate regime. The intermediate role is played by fixed exchange systems. In general, for the crisis period analysis (May 2003), relative to the floating system, a fixed regime is penalized by 4 rating levels and an intermediate is penalized by 7 levels while the floating exchange rate regime ensures approximately 8 rating levels. In May 2008 (for the recovery period analysis), these penalties are aggravated: relative to the floating system, a fixed regime is penalized by 7 levels and an intermediate is penalized by 11 levels. The contribution of the floating exchange rate regime did not much change from one period to another, being about 8 levels in May 2003 and 9 levels in May 2008. It is also demonstrated the high explanatory capacity of the model, especially in periods of crisis, when the evaluation criteria is more carefully defined. About 85% of the 19 regressors shown in this model are significant, for the period of crisis. In the recovery period, this percentage dropped to 58%. However, beyond the exchange rate regimes, the economic indicators confirm their high capacity in the determination of sovereign ratings, in the two analysed periods. The socio-political factors, when combined with the exchange rate policy, contribute significantly in determining the ratings, especially in the recovery period. For a country that has a history of default can see their sovereign rating worsened in more 2 levels (May 2003) or in more 3 levels (May 2008) when it follows an intermediate exchange rate regime.