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The Gatekeepers of Sovereign Debt Markets: The Power of Sovereign Credit Ratings Over Governments in Prosperous Developed Countries

Wednesday, March 9, 2022, 11:00 am – 1:00 pm

As gatekeepers to sovereign debt markets, credit rating agencies – these unelected, unappointed, for-profit commercial organizations – wield astonishing power over democratically elected governments. In bad times, downgrades can plunge countries into funding crises that render them insolvent from one moment to the next. But even in good times, ratings significantly influence the cost at which governments can fund themselves. Nor are ratings impartial. They assign lower ratings (and by implication, higher funding costs) to countries characterized by leftist politics, generous social insurance systems, and institutional structures characterized by checks and balances. In other words, sovereign ratings not only threaten countries’ financial stability in hard times, but also consistently interfere with their democratic choices in normal times. Despite all the protest against the destructive role played by the ratings of the ‘Big Three’ in the European debt crisis, Fitch, Moody’s and Standard and Poor’s continue to play the same role in the 2020s. This lecture explains why the current system of sovereign ratings is neither dispensable nor amenable to reform. The current architecture of global financial markets cannot function without the illusion of having reliable indicators of credit risk that allow disparate actors to make deals. Even though measuring credit risk is an impossible task, the ‘Big Three’ generate authoritative enough indicators to form a workable consensus about the riskiness of assets, and they are simply too entrenched to attempt to reconfigure that workable consensus around ratings issued by other actors. But even if it was possible to replace the ‘Big Three’ with competitors, any successors would inevitably play the same role – both in terms of destabilizing precarious situations and in terms of assigning penalties and rewards to democratic choice – because both of those features arise from the logic of trying to measure risk under conditions of radical uncertainty. The lecture relies on interviews with senior personnel at the ‘Big Three’ and at their would-be competitors as well as with officials responsible for the regulation of rating agencies at the European Securities and Market Authorities.