On Emerging Economy Spreads and Ratings Andrew Powell and Juan Francisco Martinez 1 April 2007 Preliminary Draft Comments Welcome We analyze alternative models for ratings. Recent ratings’ improvements are explained by improvements in economic fundamentals driven by a small number of world factors. On the other hand, financial variables are required, in addition to fundamentals, to explain recent spread compression. We suggest emerging market spreads are low largely due to a combination of world real factors and global liquidity or risk aversion. We exploit the differences in opinion between rating agencies and find evidence that these opinions matter for spreads. JEL Codes: Keywords: Ratings, Spreads, Panel Data. 1 Both authors are in the Research Department of the Inter American Development Bank. The opinions in this paper are solely those of the authors and do not necessarily reflect the opinion of the IDB, the board of directors nor the countries that they represent. We thank John Chambers of Standard and Poor’s and Mauro Leos from Moody’s for information and for extremely useful conversations and participants at the JP Morgan investors’ conference in Guatemala for comments on an earlier draft. Comments welcome to Andrew Powell at andrewp(at)iadb.org.