Determinants of Sovereign Defaults: An examination of fundamental factors derived from credit ratings

Abstract: Credit rating agencies have in recent literature been found to base their sovereign ratings on the same range of macroeconomic fundamentals. The purpose of this study is to find out whether these credit rating determinants are valid predictors when explaining actual defaults and not only affect the perceived creditworthiness of sovereigns. By studying a sample of 106 sovereign issuers in a logistic panel data framework this thesis finds that GDP per capita, economic growth and external debt works as determinants for actual sovereign defaults in addition to their role in determining credit ratings. The impact of the individual variables on the risk of default is also found to be in line with what is expected from earlier research and economic intuition.