Thursday, July 13, 2017
JWS - Room J10 (J355) (University of Glasgow)
How do credit rating agencies (CRAs) judge the creditworthiness of countries? This question has become especially pertinent for Europe in the wake of a series of sovereign debt crises, during which credit rating agencies (CRAs) played an important role by precipitating market panics and were criticized for being overly aggressive against some governments. Although the impact of economic variables on credit ratings has been well documented (Cantor and Packer 1996, Afonso 2003), the effect of politics and policy choice on ratings remain unclear. This paper shows that CRAs justify their rating decisions through extensive and intensive commentary on policy choices, current politics and domestic controversies. The findings arise from the content analysis of 500 rating reports issued by Standard and Poor’s between 1999 and 2012 for European countries, with a focus on political commentary and on five specific policy issue areas: pensions, privatization, labour market reform, crisis management and bank bailouts, and military expenditure. By documenting the breadth and the depth of interference of CRAs in domestic politics and policy making, the paper contributes to the debate about the constraints that markets place upon domestic politics and policy making. It provides evidence to support the view that exposure to financial markets put countries into a “golden straightjacket” (Garrett and Lange, 1991; Rodrik, 2000) against the standpoint that markets leave some countries “room to move” in their substantial policy decisions (Mosley 2000). The paper shows that countries in every rating category are subject to intense political and policy scrutiny.
