Risky Business: The Social Construction of Country Risk Ratings Open Access

Pinheiro, Diogo Lemieszek (2010)

Permanent URL: https://etd.library.emory.edu/concern/etds/4q77fr533?locale=en
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Abstract

Abstract
Risky Business: The Social Construction of Country Risk Ratings
By: Diogo Lemieszek Pinheiro
The objective of this project is to understand the origins and impact of Sovereign
and Country risk ratings. These ratings were created by key financial agencies and serve
as a way of guiding a significant part of investment in developing nations. This project
focuses on three key issues related to these risk ratings: their adoption, their
implementation, and their current impact on policy. The first issue addresses how an
abstract idea ( i.e., how financial risks should be measured) gained support and spread
throughout the world. The second issue concerns how this idea was implemented by
numerous financial service agencies. Finally, the third issue is about the impact that these
ratings have on a nation's ability to borrow money, therefore influencing policy.
Theoretically, this project deals with one of the key debates in the social sciences: are
markets rational and efficient, or does uncertainty lead to the adoption of certain
measures and policies because they are culturally and politically legitimate? To answer
this question, this dissertation employs quantitative analyses, looking at both the
statistical trends and the substantive discussions that involve the creation of these ratings.
More specifically, I use different statistical techniques to show that the spread of risk
ratings are not solely driven by market factors, and that these ratings persist despite
known inaccuracies in their methodology. They are measures of compliance with the
existing policy paradigm, and fail to adequately capture investment risk. As such, they
play a key role in the adoption of certain policies even in the face of financial crises
worldwide.


Risky Business: The Social Construction of Country Risk Ratings
By
Diogo Lemieszek Pinheiro
M.A, Emory University, 2006
Advisor: Timothy J Dowd, PhD
A dissertation/thesis submitted to the Faculty of the James T. Laney School of Graduate
Studies of Emory University in partial fulfillment of the requirements for the degree of
Doctor of Philosophy in Sociology
2010

Table of Contents

Table of Contents:

Chapter 1- Theory and Historical Background
............................................................. 1

Chapter 2 - The Origins of Sovereign Risk Ratings: the timing of their inception
. 33

Chapter 3 - The Determinants of Country Risk Rating in Latin America
............... 85

Chapter 4 - The Impact of Sovereign Risk Ratings on Economic Performance
.... 122

Chapter 5- Conclusion
.................................................................................................. 141

References ...................................................................................................................... 157



Tables and Figures:
Figure 2.1: Number of countries rated by each agency, and total number of countries
rated by any of the 3 agencies ....................................................................................... 68
Figure 2.2: Number of countries rated by Moody's; regional breakdown. ...................... 69
Figure 2.3: Number of Countries rated by Standard & Poor's; by region ........................ 70
Figure 2.4: Number of Countries rated by Fitch Ratings; by region ................................ 71
Figure 2.5: Number of countries rated speculative grade and investment grade, by agency
and overall ..................................................................................................................... 72
Figure 3.1: Mean Regional Scores for Abiad et al.'s Measure of Financial liberalization
and Chinn And Ito's Measure of Capital Account Liberalization .............................. 106
Figure 3.2: Number of nations receiving a speculative grade rating, per region: ........... 107
Figure 4.1: Average Business Cycle Magnitude for Rated and Unrated Nations in Latin
America: ...................................................................................................................... 135
References ....................................................................................................................... 150
Table 2.1: Rating Scales for each of the Big Three CRAs and their numerical conversion
....................................................................................................................................... 74
Table 2.2: Results for Moody's hazard models ................................................................ 75
Table 2.3: Results for Standard & Poor's hazard models ................................................. 76
Table 2.4: Results for Fitch Ratings hazard models: ........................................................ 78
Table 2.5: Results for hazard models regarding being rated by any agency .................... 80
Table 2.6: Mean difference in rating for the 3 agencies when the same nation is rated by
all available agencies .................................................................................................... 82
Table 3.1: Number of unique default events, by region for all rated nations ................. 109
Table 3.10: Logit models of the predictors of default .................................................... 118
Table 3.2: Numerical transformation of the letter grade ratings ..................................... 109
Table 3.3: Results for the Cox Hazard selection equation models ................................. 110
Table 3.4: Determinants of Moody's Sovereign Risk Ratings ....................................... 113
Table 3.5: Determinants of S&P Sovereign Risk Ratings .............................................. 114
Table 3.6: Determinants of Fitch's Sovereign Risk Ratings........................................... 115
Table 3.7: Determinants of average Sovereign Risk ...................................................... 116
Table 3.8: Reduced form equations measuring the predictive power of Sovereign Ratings
..................................................................................................................................... 117
Table 3.9: Comparing average ratings ............................................................................ 117
Table 4.1: Panel Corrected Results for the Portfolio Investment on Bonds Models ..... 136
Table 4.2: Panel Corrected Results for Interest Spread Models ..................................... 138
Table 4.3: ........................................................................................................................ 140
Table 5.1: The Three Theoretical Perspectives and their Predictions regarding Sovereign
Risk Ratings ................................................................................................................ 148
Table A.1: Basic descriptive statistics .............................................................................. 83
Table A3.1: Correlation Matrix for Neoliberal Policy Variables ................................... 120



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