Do Sovereign Credit Ratings Predict Crises

We attempt to evaluate the predictive ability of sovereign credit ratings using two approaches. First, we tabulate the descriptive statistics for the ratings along the lines of the signals approach and compare how these stack up to the other leading indicators we have analyzed. Second, we follow the approach taken in much of the literature on currency and, more recently, banking crises and estimate a probit model. Specifically, we estimate a series of regressions where the dependent variable is...

Why Do Credit Ratings Fail to Anticipate Crises

As discussed in chapter 1, credit ratings and interest rate spreads may fail to anticipate a crisis either because lenders do not have access to timely and comprehensive information on the creditworthiness of the borrower or because lenders expect an official bailout of a troubled sovereign borrower. We now take up two related issues that could be associated with the poor performance of credit ratings as predictors of financial crises. The first one relates to the distinction between default...

Organization of the Book

Chapter 2 takes up the leading methodological issues surrounding the forecasting of crisis vulnerability, including the choice of sample countries, the definition of currency and banking crises, the selection of leading indicators, the specification of the early warning window, and the signals approach to calculating optimal thresholds for indicators and the probability of a crisis. Chapter 3 presents the main empirical results for the in-sample estimation (1970-95), with a focus on the...

Microeconomic Indicators Selective Evidence

If, as the previous discussion suggests, banking crises are more difficult to predict on the basis of macroeconomic indicators than currency crises, it appears that the analysis of banking crises may benefit from including a variety of microeconomic indicators of bank health. Gonzales-Hermosi-llo et al (1997) and Rojas-Suarez (1998) provide some insights in this direction. Rojas-Suarez uses bank-specific data from Colombia, Mexico, and Venezuela and applies the ''signals'' methodology to this...

Index121 Tables

Table 1.1 Emerging Asia real GDP growth forecasts, 1996-98 3 Table 1.2 Rating agencies' performance before the Asian crisis Moody's and Standard amp Poor's long-term debt ratings, Table 2.1 Currency crisis starting dates 22 Table 22 Banking crisis starting dates 24 Table 2.3 Selected leading indicators of banking and currency crises 26 Table 2.4 Optimal thresholds 29 Table 2.5 Examples of country-specific thresholds currency crises 30 Table 3.1 Ranking the monthly indicators banking crises 34...

Introduction

This study analyzes and provides empirical tests of early warning indicators of banking and currency crises in emerging economies. The aim is to identify key empirical regularities in the run-up to banking and currency crises that would enable officials and private market participants to recognize vulnerability to financial crises at an earlier stage. This, in turn, should make it easier to motivate the corrective policy actions that would prevent such crises from actually taking place....