Credit rating agencies and politics

Armingeon & Battaglia

Problematique and question

• Credit rating agencies are of critical importance for interest rates on sovereign bonds.

• They claim to do it without ideology and their own politics.

• This is not very convincing if we think about literature on grading, on socialization or if we listen bankers during lunch.

• Are there ideological influences on ratings AFTER controlling for economic fundamentals an institutions (such as property rights, rule of law etc.)?

Argument

• There is a debate on democratic advantage– Democracies have better ratings and less variance

of ratings. Disputed: Is it due to rule of law etc.• There are certainly two subgroups with

subgroup-specific variation and causal pattern: – authoritarian, no rule of law, no property rights,

sometimes defaults– Democratic, rule of law, property rights, no (hardly

no) defaults.

Argument• We look only at the latter group• Our focus is democratic government and hence we will learn little if we

include non-democratic governments• We expect differences since these are experts who are socialized and trained

in Anglo-Saxon countries and in economics or business administration.• We know that these academic subjects are particular attracting students

with certain ideological stances and these views will become stabilized during studies and work.

• We expect that members of CRAs tend to view competitive democracies (such as the Anglo-Saxon democracies) as superior to consensual/negotiation democracies based on negotiation and trust.

• There is a dominant ‘neo-liberal’ discourse in economics and we expect that members of CRAs are convinced of the major assumptions of neo-liberal economics.

Research design

• Reviewing the manuals and proceedings of CRAs• Statistical analysis: Dependent Variable: Ratings, first

differences • 35 countries, 1975-2011; TSCS• A general autoregressive distributed lag model. We

started entering all explanatory variables in first differences, lagged first differences and lagged levels in the unrestricted models. Political variables have been entered in three lags of first differences variables. Backward regression.

Findings

• Methodologies: They represent the mainstream economic discourse.

• Rating agencies dislike increasing outlays –even after controlling for debt, deficit, growth, unemployment, and inflation.

• Rating agencies tend to dislike non-majoritarian democracies

• Rating agencies tend to dislike left parties

Conclusion

• If you are member of a CRA you have two votes, and your vote as a CRA member is much more important.

• Bayesian replication