Sovereign credit ratings play animportant part in determining countries' access tointernational capital markets and the terms of that access.In principle, there is no reason to expect that sovereigncredit ratings should systematically predict currencycrises. In practice, in emerging market economies there is astrong link between currency crises and default. Hence ifcredit ratings are forward-looking and currency crises inemerging market economies are linked to defaults, it followsthat downgrades in credit ratings should systematicallyprecede currency crises. This article presents resultssuggesting that sovereign credit ratings systematically failto predict currency crises but do considerably better inpredicting defaults. Downgrades in credit ratings usuallyfollow currency crises, possibly suggesting that currencyinstability increases the risk of default.
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