Credit Ratings and Fiscal Responsibility

The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fis...

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Bibliographic Details
Main Authors:	Hanusch, Marek, Vaaler, Paul
Format:	Working Paper
Language:	English en_US
Published:	2015
Subjects:	MONETARY POLICY DEFICIT HOLDING CONTRACTUAL OBLIGATIONS TIMELY PAYMENT DEFAULTS STOCK FISCAL DEFICITS INDEBTED COUNTRIES INTEREST SOVEREIGN DEFAULTS REGULATORY STANDARDS INSTITUTIONAL INVESTORS LENDING LIMITS EXCHANGE GOVERNMENT REVENUES BOND SPREADS INFORMATION DEVELOPING COUNTRIES POLITICAL ECONOMY CREDIT RATING AGENCIES REVENUES PUBLIC DEBT DATA FISCAL POLICY BONDS LOAN CREDITWORTHINESS LOAN AGREEMENT BORROWERS PUBLIC BORROWING DEBT DATA BOND YIELDS SOVEREIGN DEFAULT BUDGETING RESERVE INFLATION INTERNATIONAL BANK PENSION CREDITOR DEVELOPING COUNTRY INSTRUMENTS BUDGET FISCAL POLICIES CREDIT RATINGS EXCHANGE COMMISSION CURRENCY MORAL HAZARD RESERVE BANK BOND YIELD FINANCES DEBT OUTSTANDING MONETARY FUND SOVEREIGN BOND EMERGING MARKET FINANCIAL INSTITUTIONS DEBT MARKETS SOVEREIGN RATING DEFICITS BUDGET DEFICIT BUSINESS CYCLE LENDERS BUDGET DEFICITS BORROWING COSTS GROSS DOMESTIC PRODUCT PENSION FUNDS FINANCE FOREIGN CURRENCY INTERNATIONAL FINANCIAL INSTITUTIONS TAXES ACCESS TO INFORMATION FISCAL DEFICIT EXPENDITURE INVESTORS SOVEREIGN RATINGS SOVEREIGN DEBT FEDERAL RESERVE ELECTIONS INTEREST PAYMENTS GOOD FEDERAL RESERVE BANK PRINCIPAL PAYMENTS GLOBAL MARKET TRANSPARENCY SOVEREIGN RISK ACCESS TO CAPITAL FINANCIAL CRISIS TURNOVER FUTURE NATIONAL DEBT FOREIGN INVESTMENT GOVERNMENT REVENUE EXPENDITURES PAYMENT OF INTEREST PROPERTY PROPERTIES FOREIGN BANKS DEFAULT MARKET CREDIT RATING MARKET RISK RISK OF DEFAULT SECURITIES PUBLIC DEBT SOLVENCY INSURANCE BUSINESS CYCLES CURRENCIES GOVERNMENT DEBT ECONOMIC DEVELOPMENT INTERESTS GOODS INVESTOR SECURITIES EXCHANGE FINANCIAL MARKET SOVEREIGN LIABILITIES INVESTMENT BOND SOVEREIGN BONDS SHARE PUBLIC FINANCES POVERTY FINANCIAL MARKETS REVENUE BONDHOLDERS PROFIT LENDING DEBT OFFERINGS CHECK EXCHANGE RATE FISCAL DISCIPLINE INSTRUMENT LOCAL CURRENCIES LIABILITIES ELECTION FINANCIAL OPENNESS DEVELOPMENT BANK
Online Access:	http://documents.worldbank.org/curated/en/2015/06/24677886/credit-rating-fiscal-responsibility http://hdl.handle.net/10986/22363

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Summary:	The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fiscal expansions are heightened. The literature on political budget cycles documents the tendency for budget deficits to increase in election years as governments attempt to appear economically competent by strategically providing additional publicly financed goods or services, or by cutting taxes. A rating downgrade, however, signals the opposite of competence as it implies an increase in the probability of sovereign default. Since credit ratings are widely observed - by financial markets as well as voters - they in effect serve as a disciplining device for fiscal policy not to submit to short-term spending pressures, thus keeping it responsible. The authors find that: (1) governments going into an election year immediately after a rating downgrade are 27 percentage points more likely to lose at the polls; and (2) governments going into an election year with a negative rating outlook (indicating a higher likelihood of a near-term downgrade) run smaller budget deficits compared to cases with positive or stable outlooks. Ratings act like fiscal rules disciplining governments when they are more vulnerable to political pressures on the budget - as opposed to fiscal policies supporting longer-term economic growth and development objectives.

Credit Ratings and Fiscal Responsibility

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