Credit Rating Agencies : The Importance of Fundamentals in the Assessment of Sovereign Ratings

The aim of this paper is to investigate the significance of a set of macroeconomic variables in the assessment of the sovereign ratings provided by the three main credit rating agencies in different periods in time and for countries belonging to different categorizations. Ratings have a great economic importance as they constitute the main drivers for attracting foreign investments and can influence the dynamics of interest rates. By grouping the countries according to levels of development and indebtedness, we provide the analysis of the weights attributed to each one of the macroeconomic indicators included in the analysis. Furthermore, it is of interest to examine how ratings are constructed and if they exhibit a historical coherence that goes beyond the economic cycles. The analysis rests on an unbalanced panel of 139 countries in the period 1975-2010. In order to provide an answer to ratings' historical coherence, we selected two sub-periods: 1975-1996 and from 1997 onwards. Static estimates findings show that per capita GNI, inflation, unemployment, fiscal balance, government debt and default history significantly affect ratings, while GNI growth and current account balance are less relevant. Furthermore, Granger causality results underline that a one-way causality runs from average ratings to economic growth