Essays in sovereign debt and sovereign credit ratings

Abstract

This thesis consists of two chapters regarding the transmission of information in the sovereign debt market. The first one looks into the signaling role of the choice of debt by the sovereign and the second one focuses on a class of intermediaries in the market of sovereign debt, the credit rating agencies, and examine the information consequences of their solicited and unsolicited ratings. In the first chapter I build a model where creditworthy countries may use fiscal austerity to communicate their ability to repay sovereign debt and show that the signaling channel is active only for high levels of asymmetric information. The model generates a negative association between the amount of public information, provided by the rating agencies, and fiscal tightness. Informed by the model predictions, I perform an empirical investigation based on a panel of 58 OECD and emerging market economies since 1980 and find evidence of this signaling channel. The second chapter aims at contributing to the debate on whether unsolicited ratings are strategically motivated. I present evidence from the sovereign debt market that strategic motivation is not necessarily behind the patterns that we see in the data and propose a model of credit ratings and ancillary services that abstracts from strategic considerations. In my model, borrowers with different unobservable characteristics select themselves into different solicitation groups. In equilibrium, the model can generate either a negative or a positive selection on unsolicited ratings, depending on the share of unsolicited ratings in a given market. The economic mechanism analyzed in this chapter implies a "natural" degree of market selection which is not associated to strategic motivation.