DP9665 Sovereign credit ratings in the European Union: a model-based fiscal analysis

Author(s): Vito Polito, Michael R. Wickens
Publication Date: September 2013
Keyword(s): credit risk, default probability, fiscal policy, sovereign risk
JEL(s): E62, H30, H60
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9665

We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.