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Default, Currency Crises, and Sovereign Credit Ratings

Carmen M. Reinhart
The World Bank Economic Review
Vol. 16, No. 2 (2002), pp. 151-170
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3990154
Page Count: 20
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Default, Currency Crises, and Sovereign Credit Ratings
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Abstract

Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically predict currency crises. In practice, in emerging market economies there is a strong link between currency crises and default. Hence if credit ratings are forward-looking and currency crises in emerging market economies are linked to defaults, it follows that downgrades in credit ratings should systematically precede currency crises. This article presents results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults. Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.

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