Credit Rating Agencies and the IPE: Not as influential as thought?

ABSTRACT

Do Credit Rating Agencies (CRAs) affect national policy? This study critically examines assertions of a possible convergence to neo-liberal standards induced by sovereign bond ratings. By arguing that the role of the agencies in the global political economy has been exaggerated, the study finds that CRAs do not have a direct causal effect on domestic economic reforms. Employing a sample that covers the great majority of rated countries, it is shown that there is a robust trend towards deregulation and reform in accordance with neo-liberal standards. Nevertheless, sovereign bond ratings are not directly related to this process. Lower rated countries, or those more frequently downgraded, do not differ significantly from the highly rated countries in their pattern of policy reform. This result holds for policy domains such as regulation of credit, labour and business, inflation levels, legal structure and security of property rights, and the size of the public sector. It is concluded that the role of the CRAs as potential instigators of domestic reform is limited.

KEYWORDS:

• Credit Ratings Agencies
• policy reforms
• policy convergence
• financial globalization
• neoliberalism
• sovereignty

ACKNOWLEDGEMENTS

The author would like to thank Robbert Maseland, Harry Garretsen, Tristan Kohl and three anonymous referees for useful suggestions and comments, and Professor A. Afonso for sharing his data. Any errors are my own.

Notes

1 President's Sarkozy comment to Le Monde regarding the loss of triple-A grade for France as a ‘‘political’’ action is characteristic.

2 Namely, (i) Regulation of Credit, Labour and Business, (ii) Inflation Level, (iii) Legal Structure and Security of Property Rights, and (iv) the size of the public sector as measured by the General Government Final Consumption Expenditure.

3 <http://www.freetheworld.com/release.html>. A brief description of all variables can be found in the appendix.

4 All indexes taken from the Economic Freedom project run from the value of 0 to 10 where higher values indicate a more liberal stand with less restrictions and regulations. These scores run from as early as 1970 for some countries available in five year intervals until the year 2000. Beyond that, they are available yearly. To increase our sample size, we linearly interpolate the values within five year intervals.

5 For economy of space we do not present the results here. They are available upon request.

6 For economy of space we do not present the results here. They are available upon request.

7 For economy of space we do not present the results here. They are available upon request.

Additional information

Notes on contributors

Dimitrios Soudis

Dimitrios Soudis, born 1983. PhD Candidate Department of Global Economics and Management, University of Groningen, The Netherlands. Current Research interests: International Political Economy, Globalization, Sociological Institutionalism as an approach to IPE, Conflict.