Sovereign credit ratings in the European Union: A model-based fiscal analysis

•New way of constructing sovereign credit ratings based on fiscal stance.•Easy to calculate and transparent to interpret unlike official ratings.•Compares forecasted debt liabilities with ability to repay.•Applied to 14 EU countries for the period 1995-2012.•Identifies a European debt crisis two years before the official ratings.

We present a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use fiscal policy to repay these. We use this measure to calculate credit ratings for 14 European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.