At Cross-purposes: Commercial versus Technocratic Governance of Sovereign Debt in the EU

Abstract

The governance of EMU was premised on the idea that market discipline, informed by fiscal surveillance, supports the building of a hard currency union. Theory would lead us to expect that the international–commercial and the supranational–technocratic assessments of sovereign debt are fairly aligned. But they were not. We show that credit rating agencies and Eurostat have rather different assessments of what certain policies mean for sovereign debt. These assessments reveal divergent institutional logics of market actors and regulators. Private agencies are prone to conformism and herding behavior, allowing for little consistent discipline, while the public agency follows a bureaucratic imperative of accountability and transparency, which gets in the way of evolving policy priorities. Our findings thus shed light on the difficulties of fiscal governance by regulation only but they also suggest that reforms at the EMU level do not provide quick fixes.

Key Words:

• Euro area crisis
• fiscal surveillance
• sovereign credit rating

Acknowledgments

We are grateful to Dermot Hodson, Deborah Mabbett (both Birkbeck, University of London), James Savage (University of Virginia), and Wolfgang Streeck (MPI Köln) for most helpful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The textual evidence is based on 267 country reports between 1999 and 2012 and four different editions of rating methodologies (2006, 2008, 2011, and 2013). The content of all of these documents were systematically analyzed using the Nvivo software. Reports specifically referenced in this text are specified by country acronym and publication date. The interview evidence is drawn from a telephone interview conducted in November 2013 with one of S&P’s four primary analysts in the sovereign rating group.

2. An earlier version looked at the privatization of state-owned enterprises, left out for reasons of space. We found that despite the general agreement between EU authorities and S&P about the desirability of privatization in principle, the tangible incentives that the supranational and commercial channels of surveillance provided were quite different. European statistical rules encourage privatization to reduce current debt, thus allowing governments to prettify their fiscal performance. But Eurostat has also been at pains to ensure that some of the hidden losses entailed in the sale of government assets are recorded transparently (Savage 2005: 81–89). S&P, on the other hand, did not acknowledge costs of privatization. Apart from the occasional warning that one-off measures to decrease the deficit should be greeted with caution, the reports do not take into consideration that privatization deals may be myopic and reduce future revenues.

3. S&P Au2000June13, Au2003May21, Be1999Feb1, Be2002Feb18, Be2003Mar18, Be2004Jan23, Fr2001Jan24, Fr2002Jan28, Fr2003Mar19, Fr2004Jan20, Fr2006Feb28, Ge2002Dec10, Ge2003May6, Ge2005Mar1, Ge2005Nov16, Ge2006Dec19, It1999May27, It2000Apr19, It2001Oct26, It2003Jan15, It2006Oct19.

4. S&P Dk2001Feb27, Dk2002Mar26, Dk2003Apr9, Dk2004Aug26, Dk2005Sep30, Dk2006Sep25, Dk2007Sep26, Ir1999Aug13, Ir2000Oct3, Ir2001Oct3, Ir2002Sep5, Ir2003Oct30, Ir2004Dec23, Ir2005Dec20, Ir2006Dec21, Ir2007Nov23, UK2003June24.

5. S&P Ir2004Dec23, Ir2005Dec29, Ir2006Dec21, Ir2007Nov23, Sp2004Dec13, Sp2005Nov28, Sp2006Nov28, Sp2007Nov26, UK2005Mar31, UK2006Nov10.

6. The 2007 November credit report contended that ‘Ireland’s extremely strong [AAA] credit standing should remain secure against most foreseeable downside economic, political, and financial risks’ (S&P Ir2007Nov13: 3).

7. S&P Ir2009Mar30, Ir2009June8, Ir2010Aug24, 2010Nov23, Ir2011Feb2, Ir2011Apr1.

8. Examples of the type of independent assessment of the costs of banking crisis can be found in the March 2009 and the April 2010 rating reports on Ireland (S&P Ir2009Mar30: 2–3 and Ir2010Apr8: 2–3).

9. Interestingly, the new methodologies explicitly promise to avoid the mistake that S&P committed when not acting upon asset bubbles and credit-fueled growth in Spain and Ireland before the crisis: ‘A sovereign’s economic score would be one category worse than the initial score, when GDP growth seems to be fueled mostly by a rapid increase in banking sector domestic claims on the private sector, combined with a sustained growth in inflation-adjusted asset prices, indicating vulnerability to a potential credit-fueled asset bubble’. (S&P 2011: 17, a similar paragraph can be found in S&P 2013: 16).

10. S&P Au2012Jan13, Be2011Nov25, Gr2010Apr27, Gr2012May2, It2011Sep19, Pt2010Apr27

11. In this collective rating action, nine sovereigns were downgraded, whereas the ratings of seven others were affirmed (S&P 2012).

12. The number of banks that are thus kept alive is much higher than the indicator of defeasance structures all over Europe shows. The ECB is forced to keep many banks on its list of monetary and financial institutions with access to the discount window. If they were declared part of defeasance structures, the ECB could not support them with its liquidity measures as this would fall under the prohibition of monetary financing of governments (Mabbett and Schelkle 2014: 19–20).

13. The new rules mandate CRAs to set up a calendar indicating when they will rate Member States and to rate sovereigns at least every 6 months, but not more often than three times a year. They also stipulate that rating changes may only be announced on Fridays after close of business to allow governments to react to the news before markets can move. They require CRAs to make their methodologies public and invite comments from stakeholders. They also demand that CRAs disclose the assumptions that their assessment is based on. They seek to create greater accountability by making CRAs liable for errors caused by ‘gross negligence’. (see: http://europa.eu/rapid/press-release_IP-13-555_en.htm?xrs=RebelMouse_tw accessed on 29 December 2014).