The Impact Of Euro - Zone National Sovereign Credit Rating On National Debt Market

Based on the particular background of European sovereign debt crisis, this paper does research about effect of sovereign credit rating on government bond market of EMU countries. Standard&Poor’s, Moody’s and Fitch, rating symbols from which have been broadly accepted and used, have been monopolizing the international rating market. During debt crisis this BIG THREE frequently downgraded the credit ratings of PIIGS, substantially pushing up related countries’ sovereign debt yields, which to some extend damped the crisis. Moreover with the spread of crisis, some of the core nationsonce faced potential downgrade, spurring investors’ concerns on the economical fundamentals, which heavily worsened the European debt crisis.The paper well establishes its empirical study on theory analysis.11EMU countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal and Spain) with10-year sovereign bond yield on daily basis between07/13/2006and12/31/2012are adopted to study sovereign rating’s effect on yields. The results show that government bond market actually didn’t anticipate the potential rating changes. Forvery short event period differentrating changes affected spreads asymmetrically. Specifically speaking, the downgrades or negative outlook reversions had more influence on the yield spread than positive rating changes. And for as long as6monthes rating changes would affect the spread. Besides, spillover effect was obvious, especially forcountries with high public debt suffering contagions a lot. The paper also runs regressions on yield spreads with ratings and other control variables such as macroeconomic indicatiors and policy factors, which would probably have effect on the spread. And still the coefficient ofrating proved highly significant. To avoid the endogeneity GMM model is tested, again the result stands that the rating had independent and significant explanatory power with respect to sovereign bond yield spreads. Thus the author concludes that the sovereign credit rating may providemarket with new information, which can influence invesotrs. At last, some advices are provided for the financial security considering China’s increasing open to the global financial system. One practice is to establish independent rating agencies and strengthen the regulation of sovereign rating process.