Rating politics: The political economy of increased rating scrutiny over domestic politics and policy-making in developed economies since the economic and financial crisis

Abstract:

Rating agencies have played a prominent role in the sovereign debt crisis currently besetting Europe. Sovereign rating downgrades contributed to the fall of the first domino, Greece, and have since continued to fuel anxiety both in markets and among governments. Policy-makers in the prosperous developed countries that are now under greatest pressure vehemently protest against the immense power of rating agencies over the immediate and longer-term fiscal viability of their countries. While Standard and Poor’s, Moody’s and Fitch had previously been given a central role within regulatory frameworks to monitor risk, they are now seen as undesirable meddlers in policy-making. But is government room for manoeuvre more tightly constrained by the pronouncements of the agencies now than it was before, or is it more that the usual constraints have become more uncomfortable for policy-makers under the adverse new economic conditions? This paper contends that rating agencies have significantly changed their attitude towards prosperous developed countries since the start of the crisis. Agencies now treat these prosperous developed countries in precisely the same way that they used to treat developing countries in the decades before the crisis. This implies far greater and more inquisitive scrutiny of political developments and politically-loaded policy-decisions in developed countries than before. This contention is built on an analysis of the sovereign rating methodologies of the three large rating agencies and the press releases issued over the rating evolution of four countries: the US, Italy, Hungary and Romania. This analysis suggests that, before the crisis, a divide existed in the approach of rating agencies to developed versus developing countries, but they have applied the same standards to these different categories since the start of the crisis, although the evidence is ambiguous at times.