The Impact of Euro Adoption on Sovereign Credit Ratings and Long-term Rates
The paper investigates the impact of euro adoption on sovereign credit ratings and on long-term rates experienced until the 20th anniversary of the euro. The three pillars of the research are (1) the analysis of the scoring methodology of Credit Rating Agencies,
(2) the empirical investigation of the 'euro privilege' in the ratings of Fitch, Moody's and S&P, and (3) in the long-term rates. We find that the methodology of ratings allows an upgrade up to 2 notches from admission to the Exchange Rate Mechanism II to joining the euro. The euro privilege was estimated with the Arellano-Bond general method of moments (GMM) and the difference-in-difference (DD) estimators. The euro privilege fluctuated in the range of 0-1 notch before the financial crisis, and reached its 1.5 notch maximum at the peak of the crisis and disappeared during the euro crisis. The benefits from euro adoption for long-term rates are more difficult to justify empirically in general. Although improved credit quality, lower liquidity and FX risk and access to ECB operations played a role in case of some later euro adopters in lowering funding costs, for some Member States euro privilege was not confirmed in long-term rates. Results are relevant for current and candidate Eurozone members, as they allow an estimate of some of the benefits and sometimes costs of euro adoption and
may shed light on the importance of deepening the Economic and Monetary Union and strengthening the international role of the euro further.
ERHART Szilard;
2021-03-12
Publications Office of the European Union
JRC123479
978-92-76-30955-0 (online),
1831-9424 (online),
EUR 30617 EN,
OP KJ-NA-30617-EN-N (online),
https://publications.jrc.ec.europa.eu/repository/handle/JRC123479,
10.2760/59588 (online),
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