Sovereign Credit Rating Determinants of the EU Countries: The Role of the Euro Area Crisis and Its Legacy

Abstract

Objective: The objective of the article is to identify the determinants of the EU countries’ sovereign credit ratings with a particular focus on the impact of the euro area crisis.

Research Design & Methods: The study is conducted for the 28 EU countries for the years 2004-2018. The research period is later divided into pre-crisis, crisis, and post-crisis subperiods. The frequency of data is yearly, and panel error correction model is used as the main research method.

Findings: The study shows that the role of individual credit rating determinants differed in the distinguished subperiods. In particular, the condition of the banking sector seems to have gained in importance after the outbreak of the euro area crisis and remained high in the post-crisis years. At the same time, the status of being a euro area member, which negatively affected countries’ ratings during the crisis, switched again to positive in the post-crisis period. Its effect is however much weaker than before 2008.

Implications & Recommendations: EU/euro area countries should continue reforms aimed at weakening negative feedback loops between banks and sovereigns. Based solely on the rating criterion, it seems that non-euro area EU members are not necessarily better off staying on the side-lines of the European integration process.

Contribution & Value Added: The study extends the literature on the determinants of sovereign credit ratings by showing how the role of individual factors might change depending on varying economic conditions, and by taking into account the specific context of the euro area crisis.