Newswire messages and sovereign credit ratings: Evidence from European countries under austerity reform programmes

a r t i c l e i n f o The paper examines the role of newswire messages during the European debt crisis. In particular, this study quantifies how this news metric, revealed by statements electronically recorded, as well as by newspaper articles, affects credit ratings. Through a sample of three European countries with sovereign debt problems and under strict austerity programmes, i.e., Greece, Ireland, and Portugal, daily data spanning the period of 2009 to 2011, and parametric, nonparametric and ordered probit panel methodologies, the obtained results document that the news variable significantly affects credit ratings, particularly when news comes from market sources but less so when the news is from politicians. In recent years, there has been a surge in the role of news indicators to predict stock, corporate, and sovereign bond risk profiles. This interest in risk-driven variables can be explained by the short-term behaviour of equity and bond markets since the first jolt of the recent financial crisis and the lower relevance of long-term fundamentals in determining market movements since then. Investors keep a close eye on the spread between core and peripheral government bond yields, which is the heart of the issue of systemic risk. According to Blinder, Ehrmann, Fratzscher, De Haan, and Jansen (2008), news sentiment indicators alter market expectations due to the presence of asymmetric information between policy and market makers and the public. Although in the field of monetary economics such news mechanisms have been extensively among others), empirical knowledge on the effect of news (originated from either public statements or newspapers articles) on credit ratings is absent. The onset and acute growth of the sovereign debt crisis in Europe has produced a new wave of debate on the role and influence of credit rating agencies and about the quality and reliability of their evaluations, especially of sovereign issuers. Therefore, in regard to credit rating agencies, questions arise regarding criteria underlying sovereign ratings and how such ratings affect borrowing costs across countries. Sovereign ratings are assessments of the relative likelihood that a borrower, in our case a country, will default on its obligations. In a sense, such ratings incorporate a type of forward-looking measure of the probability of default. Credit rating studies, however, have ignored the fact that qualitative public information sources, such as newspapers, may complement existing types of economic variables and improve performance of credit rating models for a number …