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Sovereign Credit Ratings under Fiscal Uncertainty


Working papers


Sovereign Credit Ratings under Fiscal Uncertainty

Download PDF: Working Paper 32

This paper finds that fiscal uncertainty is an important determinant of sovereign credit ratings, and can explain why ratings often appear pro-cyclical during crisis periods.

Author: Arno Hantzsche



This paper studies the response of credit rating agencies to an increase in uncertainty about a government's fiscal position. To that end, a measure of the uncertainty around official forecasts of the public budget deficit is constructed that is comparable across time and a range of advanced economies. To estimate the effect of fiscal uncertainty on sovereign credit ratings, an empirical framework is developed that accounts for the high stability of ratings over time. Results suggest that fiscal uncertainty increases the predictive power of a model of rating changes and can explain why sovereign ratings are often changed more frequently during crises.

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: uncertainty, fiscal policy, sovereign credit ratings, ordered outcome estimation

JEL codes: C35, G24, H68

Source: European Stability Mechanism | Working Paper Series | Volume 2018 | No 32 | November 2018 | 47 Pages

Copyright © European Stability Mechanism, 2018 | 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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