To Judge Leviathan: Sovereign Credit Ratings, National Law, and the World Economy

Abstract

Recent decades have witnessed the remarkable rise of a kind of market authority almost as centralized as the state itself – two credit rating agencies, Moody's and Standard & Poor's. These agencies derive their influence from two sources. The first is the information content of their ratings. The second is both more profound and vastly more problematic: Ratings are incorporated into financial regulations in the United States and around the world. In this article we clarify the role of credit rating agencies in global capital markets, describe the host of problems that arise when their ratings are given the force of law, and outline the alternatives to the public policy dilemmas created when ratings receive a public imprimatur. We conclude that agencies designated for regulatory purposes should be required to provide more nuanced ratings exposing their perceptual and ideological underpinnings (especially for sovereigns), and facilitating consideration of alternatives to ratings-dependent regulation.

The Politics of Rating Freedom: Ideological Affinity, Private Authority, and the Freedom in the World Ratings

“…36 Debates over meanings often reflect different cultural and ideological understandings about the concepts in question. 37 Potential users are more likely to view benchmarks as authoritative if the underlying concepts are defined in ways that match their worldviews. Illustrating this idea, among audiences that care about democratic elections, the reports of election monitors from non-democracies tend to lack credibility and thus private authority because such monitors are not perceived by audiences in democracies as wanting to promote free and fair elections.…”

Regulation and the Management of Expectations—Rating Agencies Revisited

“…Rating processes are frequently criticized for being insufficiently transparent and objective (Sinclair 1994; 2005; Bruner and Abdelal 2005; Iyengar 2010). It is claimed that more publicly available information about rating processes could enhance the understanding of final ratings and help market participants form better expectations about the creditworthiness of rated entities.…”

“…This creates an artificial demand for credit ratings issued by firmly established CRAs that is not conditional upon the actual quality of ratings. Therefore, “ratings no longer function as opinions to be taken or left by investors, and market discipline is accordingly sacrificed” (Bruner and Abdelal 2005, 202). Put differently, regulators have endowed CRAs with a legal authority that translates into an authoritativeness of ratings which is not conditional on the actual quality of ratings.…”

A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth, Not Scapegoats

“…It is true that the threat of a sovereign ratings downgrade operates as a significant coercive force driving national governments to design and implement policies that accommodate CRAs’ tastes and will earn their approval (Sinclair, 1994, 2003; Gatz, 2004). Noticing that the dominant internationally active CRAs are established in the US, some commentators move one step further to argue that ratings play the role of the Trojan Horse to “export US models of financial orthodoxy” (Sinclair, 1994, p. 149) or, to put it more directly, to disseminate “U.S.‐centric standards globally” as US‐based CRAs “are, ironically, in a position to tell other governments what to do and how to conduct their economic policies in a blunt vocabulary unavailable to the U.S. government” (Bruner and Abdelal, 2005, pp. 208–209) 12…”

“…The Dodd‐Frank Act contemplates separate disclosure of the qualitative and quantitative information underlying ratings 187 . A further step would be to mandate that CRAs provide a distinct quantitative‐only rating along with their basic overall rating such that investors can identify the pure quantitative credit assessment of CRAs and how much it has been affected by rating analysts’ subjective‐qualitative assessment when producing the overall rating (Bruner and Abdelal, 2005, pp. 211–213).…”