Ratings, Debt, and Deficits: An Exploration
IMF Working Papers, September 18, 2026
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- Ratings, Debt, and Deficits: An Exploration
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Bibliographic details
- Authors: Olivier J Blanchard, Daniel Leigh, Prachi Mishra
- Published: September 18, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229062213.001
Summary of main findings
- The paper examines the effects of debt and primary fiscal balances on sovereign credit ratings using a simple model.
- Ratings differ from model implications in three important ways:
- They give much more weight to debt relative to forecast primary balances.
- They understate the effects of the difference between the interest rate and the growth rate.
- They give a very large role to country effects.
- Consequences highlighted:
- For the same level of debt and forecast primary balances, ratings imply extremely different outcomes across countries.
- Ratings imply extremely different levels of debt needed to reach a given rating across countries.
Analytical approach and interpretation
- Lens: a simple model linking debt dynamics and forecast primary balances to sovereign credit ratings.
- Emphasis on comparing model-implied relationships to actual rating behavior, isolating:
- Weighting of debt versus forecast primary balances.
- Sensitivity to (interest rate − growth rate).
- Magnitude and role of country-specific fixed effects in ratings.
Policy-relevant implications
- Reliance on current ratings may overemphasize debt stock relative to fiscal adjustment prospects (forecast primary balances).
- Ratings may underreact to shifts in the interest rate–growth differential, potentially understating future sustainability risks when (interest rate − growth rate) worsens.
- Large country effects suggest that identical fiscal profiles can lead to very different rating outcomes across countries, complicating cross-country policy benchmarking and debt-target setting.
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- Working Paper