The Nonlinear Relationship between Public Debt and Sovereign Credit Ratings

38 Pages Posted: 27 Aug 2019

See all articles by Metodij Hadzi-Vaskov

Metodij Hadzi-Vaskov

International Monetary Fund (IMF)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

Abstract

This study investigates the nonlinear relationship between public debt and sovereign credit ratings, using a wide sample of over one hundred advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus in emerging markets and developing economies. These results hold for both gross debt and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications. These findings underscore the potential for fiscal consolidation in helping countries achieve a better credit rating.

Keywords: Sovereign credit ratings, Credit ratings, Development, Financial markets, Financial management, Public debt, Credit rating agencies, Advanced economies, Emerging markets, Non-linearities, full sample, probit, LIG, VIX, HIG

JEL Classification: E44, E62, G15, G24, E01, E52, G21, F16

Suggested Citation

Hadzi-Vaskov, Metodij and Ricci, Luca Antonio, The Nonlinear Relationship between Public Debt and Sovereign Credit Ratings (July 2019). IMF Working Paper No. 19/162, Available at SSRN: https://ssrn.com/abstract=3442876

Metodij Hadzi-Vaskov (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

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