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The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases


Working papers


The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases

Download PDF: Working Paper 34

This paper uses data on sovereign ratings for developed and emerging countries to understand the dynamics of investment-grade and speculative-grade phases.

Authors: Luca Agnello (University of Palermo), Vitor Castro (Loughborough University) and Ricardo Sousa (European Stability Mechanism)



Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we rely on discrete-time Weibull models to investigate the duration and determinants of sovereign ratings phases. We find that the likelihood of the end of the 'speculative-grade' phase increases as time goes by (i.e. positive duration dependence), but the 'investment-grade' phase is not duration dependent. Thus, for sovereigns rated as speculative, the build-up of reputation as good borrowers is a gradual process, whereas the reputation of investment-grade sovereigns solidifies and remains unchanged as time passes. However, the length of both phases has proven to be significantly dependent on the country's economic conditions and the quality of governance. In particular, lower inflation, better economic performance and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, a better perception of the quality of public services and the ability of the government to formulate and implement sound policies and regulations help to reduce the duration of speculative-grade phases.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: Duration analysis, Weibull model, duration dependence, sovereign ratings, speculative-grade, economic environment, fiscal position, quality of governance.

JEL codes: G10, G15, G24, C23, C25

Source: European Stability Mechanism | Working Paper Series | Volume 2019 | No 34 | January 2018 | 40 Pages

Copyright © European Stability Mechanism, 2019 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.

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