Credit rating agencies and the sovereign debt crisis: Performing the politics of creditworthiness through risk and uncertainty

Abstract

1As Member States struggle to retain the investment grades necessary to allow them to finance their governmental operations at a reasonable cost, credit rating agencies (CRAs) have been blamed for exacerbating a procyclical bias which only makes this task more difficult. How CRAs contribute to the constitution of the politics of limits underpinning the European sovereign debt crisis is at the core of this article. As a socio-technical device of control, sovereign ratings are an 'illocutionary' statement about budgetary health, which promotes an artificial fiscal normality. Subsequently, these austere politics of creditworthiness have 'perlocutionary' effects, which seek to censure political discretion through normalizing risk techniques aligned with the self-systemic, and thereby selfregulating, logic of Anglo-American versions of capitalism. The ensuing antagonistic relationship between the programmatic/expertise and operational/politics dimensions of fiscal governance leaves Europe vulnerable to crisis and the renegotiation of how the 'political' is established in the economy.New regulatory technical standards (RTS) can exacerbated the performative effects on CRAs, investors and Member States.

The role of sovereign credit ratings in fiscal discipline

“…Ratings are defined as being pro-cyclical when CRAs assign higher ratings to countries than their macroeconomic fundamentals would justify during "bad times" and shy away from downgrading even if their fundamentals suggest they should do so during "good times". A clear example of pro-cyclicality of ratings occurred when the ratings of major EU countries were sharply downgraded during the EU debt crisis (G¨artner et al, 2011;Eijffinger, 2012;Paudyn, 2013). The fiscal indicators of these countries had already been alarming in the run-up to the crisis.…”

“…Since high-rated countries can find cheaper and more plentiful funding opportunities, these countries' fiscal indicators are generally expected to be worse than lower rated countries . The expectation that their ratings will hardly change feeds this anomaly (Paudyn, 2013).…”

“…See Eijffinger (2012), Pagano and Volpin (2010), White (2010), Ozturk (2015) and Paudyn (2013) for an excellent discussion.…”

Global wealth chains in the international political economy

“…Those applying particular financial theorems then engage in 'performativity' that directs markets and heightens uncertainties. Others have recently discussed performativity in international microfinance markets (Henriksen 2013) and credit rating agencies (Paudyn 2012). There has also been a focus on global or transnational 'microstructures' that create convergence on how particular assets, products, and identities are viewed in European and American financial markets (Knorr Cetina and Bruegger 2002;Stark 2009).…”

The regulator's conundrum. How market reflexivity limits fundamental financial reform

“…In the run-up to the crisis, these routines had increasingly been handed to private actors, for example when Basel II allowed major banks to rely on their own risk models to calculate required capital (Tarullo, 2008) and also reinforced private credit rating agencies (CRAs) as arbiters of creditworthiness (Kruck, 2011;Paudyn, 2013). Just like fair value accounting (FVA) (Botzem, 2013), which relied on markets to value assets and liabilities, these valuation routines proved destabilizing: optimism would feed strong valuations, which would buttress firms' confidence and thus encourage further lending and risk-taking.…”