PIGS or Lambs revisited: Reassessing the Role of Rating Agencies in the European Sovereign Debt Crisis

Sammanfattning: This paper examines whether credit rating agencies have indeed played as active a role in the Euro crisis as previously asserted. Using panel data methods for a set of 11 EMU countries, it assesses the robustness of an earlier analysis to the inclusion of additional explanatory variables. Whereas rating agencies were previously shown to have placed a significant markup on GIPS countries during the Euro crisis, this paper finds that its size was overstated as a result of omitted variable bias, although it remains significant. A cross-agency comparison shows that the Big Three rating agencies used this markup to a differential extent, however. A subsequent analysis of the markup's effect on yield spreads finds only inconclusive evidence to refute the argument that rating agencies played an active role in the crisis. Central to the analysis is the inclusion of institutional variables from the World Governance Indicators. A novel functional form of the indicator Rule of Law is shown to perform well in explaining sovereign ratings, but not in the subsequent analysis of yield spreads.