The United States Credit Rating Downgrade: European Reaction

The purpose of this paper is to answer the important question of how investors viewed the debt obligations from European countries in reaction to the United States credit rating downgrade by Standard and Poor’s on August 5 2011. During this period there were a handful of countries in Europe that still had AAA ratings. This paper looks at the reaction of investors towards Europe, through the medium of Credit Default Swaps (CDSs). By analyzing the changes in CDS spreads, I am able to determine the perceptions of investors regarding the risk of European Sovereigns during the timeframe surrounding the U.S downgrade. The results in this study show that investors perceived greater risk in European countries than in the United States. The Increase in CDS spreads in European countries are driven by countries with less GDP, more corruption, countries that had not been downgraded, and countries that were not part of the European Union or Euro Zone