Corruption and Creditworthiness: Evidence from Sovereign Credit Ratings ⁄

We estimate the impact of corruption on a country's creditworthiness. Corruption affects creditworthiness through its impact on the size of the formal sector of an economy. We find that creditworthiness, as measured by sovereign credit ratings, is decreasing in corruption. It follows from our benchmark estimates that a one standard deviation decrease in corruption improves sovereign credit ratings by almost a full rating category (e.g. BBB to A). On long term foreign currency denominated debt, this translates into annual savings of roughly $10,100 for every $1 million of debt.

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