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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=298262 Default, Currency Crises and Sovereign Credit Ratings

Carmen M. Reinhart University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER)

January 2002

NBER Working Paper No. W8738

1. Political risk - Stability, predictability and transparency of political institutions - Public and national security - Responsiveness to change and adapt 2. Income and Economic Structure - Degree economy is market-oriented - Extent of property rights - Per-Capita GDP 3. Economic Growth Prospects - Changes in standard of living - Income distribution 4. Fiscal Flexibility - Tax revenues, expenditures and past performance in balancing budgets - Methods of deficit financing and their inflationary impact - Growth friendly tax system and the ease of which it can be changed - Efficiency of expenditures 5. Government Debt Burden - Extent to which government can pay and manage its debt 6. Off-Budget and Contingent Liabilities - Size and health of non-financial public sector enterprises - Health of financial and banking system 7. Monetary Stability - Credit trends - Price behavior in past economic cycles - Level, currency and maturity of public sector debt - Money and credit expansion - Independence of central bank - Compatibility of exchange rate regime with monetary policy - The range and efficiency of monetary policy tools - Depth and breadth of capital markets 8. External Liquidity - Structure of merchandise trade, service, income and transfers - Vulnerability to changes in investor sentiment - Gross external financing as a percentage of official foreign exchange reserves 9. Private Sector Debt Burdens - Residents assets and liabilities 10. Public Sector Debt Burdens - Trends in public sector debt - Contingent liabilities - Foreign exchange reserves

Table 3: Moody’s Sovereign Categories 1. Economic Structure and Performance - GDP, inflation, population, GNP per capita, unemployment, imports and exports 2. Fiscal Indicators - Government revenues, expenditures, balance, debt all as percentage of GDP 3. External Payments and Debt - Exchange rate, labor costs, current account, foreign currency debt and debt service ratio 4. Monetary and Liquidity Factors - Short-term interest rates, domestic credit, M2/foreign exchange reserves, maturing debt/foreign exchange reserves, liabilities of banks/assets of banks

1. Enron was rated investment grade by the NRSRO's four days before bankruptcy;

1. The California utilities were rated "A-" two weeks before defaulting;

1. WorldCom was rated investment grade three months before filing for bankruptcy;

1. Global Crossing was rated investment grade in March 2002 and defaulted on loans in July 2002;

1. AT&T Canada was rated investment grade in early February 2002 and defaulted in September 2002; and

1. ABB was rated "A2" by Moody's as of March 14th 2002 and was rated "Ba2", negative watch as of October 31, 2002. Similarly, S&P rated ABB at "A+" as of March 14th, 2002 and "BBB-", negative watch as of November 5 th 2002.

S Failures

Enron November 2001 Orange County California, Mercury Finance, Pacific Gas & Electric, Enron, WorldCom, Delphi, General Motors and Ford.

FINANCIAL GATEKEEPERS: CAN THEY PROTECT INVESTORS?, Yasuyuki Fuchita, Robert E. Litan, eds., Brookings Institution Press and the Nomura Institute of Capital Markets Research, 2006 San Diego Legal Studies Paper No. 07-46