The Ghost of a Rating Downgrade: What Happens to Borrowing Costs When a Government Loses its Investment Grade Credit Rating?

M. Hanusch, S. Hassan, Y. Algu et al. | The World Bank

Since the global financial crisis and the end of the commodity super-cycle, weak growth and countercyclical fiscal policy have contributed to deteriorating public finances in many countries across the globe. As public debt burdens rose, credit ratings deteriorated and a number of countries have been downgraded from investment to sub-investment (‘junk’) grade. Rating downgrades continue to haunt countries in a world of low growth. This paper examines the effect of such downgrades on short-term government borrowing costs, using a sample of 20 countries between 1998 and 2015. The analysis suggests that a downgrade to sub-investment grade by one major rating agency increased Treasury bill yields by 138 basis points on average. Should a second rater follow suit, Treasury bill rates increase by another 56 basis points (although this effect is not statistically significant)

Tunisia, South Africa, Egypt, Bond Markets & Exchanges, Credit Ratings
Year of publication:
File size:
765328 bytes