The Importance of Risk Ratings in Romania

Abstract

Risk qualification, no matter we talk about a country, a corporation, a project or about bonds, reflects two main issues: default risk and recovery prospects. The main values assigned to rating are linked to its informational content and its use as regulating instrument. In this paper we demonstrate, taking as example Romania between 1996-2007, that (1) there is a negative correlation between sovereign rating and incoming flow of capital to Romania in the form of medium and long term debt (2) sovereign long term foreign currency rating is positively correlated with interest margin used by private lenders from Romania, so it influences the cost of internal financing (3) the rating has a potential regulating value for issuers and investors.

Keywords: Risk, Rating, capital flow, sovereign rating

JEL Classification: G32