Arbiters or Meddlers? the Political and Policy Agenda of Sovereign Credit Rating Agencies

How do credit rating agencies (CRAs) incorporate politics and policy into their assessments of sovereign creditworthiness? It has been amply documented that fiscal and economic outcomes and broad political institutional structures impact sovereign credit ratings, but it has never been investigated whether and how the bread and butter politics of elections, government partisanship and politically-loaded policy choices influence ratings. Although CRAs rating methodologies remain silent about everyday politics and policy choices, our paper shows that these issues exercise a significant influence on sovereign credit ratings. Using a database integrating the textual analysis of more than 600 rating reports issued by Standard and Poor’s (S&P) about European countries between 1999 and 2012, partisan manifestos of governments in office and the relevant fiscal and economic indicators, we show that S&P attaches a negative ratings premium to left governments in office as well as to policy decisions related to maintaining the size of the government sector and welfare state commitments, even when fiscal and economic indicators are controlled for. We also show that S&P is more likely to (negatively) comment on day-to-day politics and question the credibility of government commitments and forecasts when the left is in power.