Reinhart, Carmen M.2014-03-042014-03-042002-05World Bank Economic Reviewhttps://hdl.handle.net/10986/17199Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically predict currency crises. In practice, in emerging market economies there is a strong link between currency crises and default. Hence if credit ratings are forward-looking and currency crises in emerging market economies are linked to defaults, it follows that downgrades in credit ratings should systematically precede currency crises. This article presents results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults. Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.en-USCC BY-NC-ND 3.0 IGOARREARSASSET PRICEBAILOUTBAILOUTSBALANCE SHEETBANK DEBTBANK FAILURESBANKING CRISESBONDBONDHOLDERSBUDGET DEFICITCAPITAL ACCOUNTSCAPITAL INFLOWSCOMMERCIAL CREDITORSCOMMERCIAL DEBTCREDIT RATINGCREDIT RATING AGENCIESCREDIT RATINGSCREDITORSCREDITWORTHINESSCRISES IN EMERGING MARKETCRISES IN EMERGING MARKETSCURRENCYCURRENCY CRISESCURRENCY CRISISCURRENCY OVERVALUATIONCURRENT ACCOUNTCURRENT ACCOUNT BALANCEDEBTDEBT CRISESDEBT CRISISDEBT DEFAULTDEBT OUTSTANDINGDEBT PROBLEMSDEBT RATINGDEBT RATINGSDEBT REPAYMENTSDEBT RESTRUCTURINGDEBT RESTRUCTURING AGREEMENTDEBT SERVICINGDEFAULT PROBABILITYDEFAULTSDEPENDENTDEPENDENT VARIABLEDEPRECIATIONSDESCRIPTIVE STATISTICSDEVALUATIONDEVALUATIONSDOMESTIC CURRENCYDUMMY VARIABLEECONOMIC DEVELOPMENTECONOMIC POLICYEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET ECONOMIESEMERGING MARKETSEQUAL SHAREEXCHANGE MARKETSEXCHANGE RATEEXCHANGE RATE CRISESEXCHANGE RATE MECHANISMEXCHANGE RATE REGIMEEXPLANATORY VARIABLEEXPORT RATIOEXPORT RATIOSEXTERNAL DEBTFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DISTRESSFINANCIAL MANAGEMENTFINANCIAL MARKETSFINANCIAL STRESSFINANCIAL SUPPORTFINANCIAL SYSTEMFINANCIAL VULNERABILITYFOREIGN CURRENCYFOREIGN CURRENCY DEBTGLOBAL DEVELOPMENT FINANCEGLOBAL FINANCIAL SYSTEMINCOMEINFLATIONINFLATION EPISODEINFLATION RATEINSTITUTIONAL INVESTORINSTITUTIONAL INVESTORSINTEREST RATEINTEREST RATE SPREADSINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL CREDITINTERNATIONAL ECONOMICSINTERNATIONAL ECONOMYINTERNATIONAL INTERESTINTERNATIONAL INTEREST RATEINTERNATIONAL LENDINGINTERNATIONAL MONETARY FUNDLIQUIDITYLOANLOCAL CURRENCYLONG-TERM DEBTLOW-INCOME COUNTRIESMACROECONOMIC INDICATORSMARKET CONDITIONSMARKET RISKMISALIGNMENTSMONETARY FUNDOUTPUTOUTSTANDING DEBTPOLITICAL ECONOMYPRICE BEHAVIORPROBABILITY OF DEFAULTREAL EXCHANGE RATERECESSIONSREMEDIESRESERVERESERVESRISK OF DEFAULTSAVINGSSERIAL CORRELATIONSHORT-TERM CAPITALSHORT-TERM DEBTSOVEREIGN BONDSSOVEREIGN DEBTSOVEREIGN DEFAULTSOVEREIGN DEFAULTSSOVEREIGN RATINGSOVEREIGN RATINGSSOVEREIGN RISKSTANDARD DEVIATIONSTANDARD DEVIATIONSSTOCK RETURNSTIME HORIZONSTRACK RECORDVOLATILITIESWEIGHTSWORLD INTEREST RATESYIELD SPREADSJournal ArticleWorld Bank10.1596/17199