How Do Rating Agencies Affect Governments’ Autonomy

In the context of the 2008-2009 global financial crisis, how do rating agencies affect governments’ autonomy?

Would non-profit rating agencies be a useful governance tool?

1. Introduction

[I]t is annexed to the sovereignty to be judge of what opinions and doctrines are averse, and what, conducing to peace …

Thomas, Hobbes, The Leviathan

Hobbes claims that it is the right of the sovereign to be the arbiter of public indoctrination. Yet, economic policies of governments have always been judged by the market. In the past decades an unprecedented rise of a market-based authority influencing governments’ autonomy, meaning the right to administer their own affairs, has taken place (Darwall 2006, p.1). Credit rating agencies (CRAs) have through their ‘opinions’ on creditworthiness of debt issuers, including sovereign states, attained a ‘quasi-governmental’ status (Bruner and Abdelal, 2005; Bertelsmann Foundation, 2012a).

The 2008 financial crisis served as a catalyst to bring the deficiencies of the financial sector to break cover. One of the key institutions put under the microscope were CRAs. There is a broad consensus that CRAs contributed to the global financial crisis, which began in the United States of America (USA) with problems emerging in the subprime mortgage market and have since then taken global dimensions (Utzig, 2010). This paper analyses the ongoing reputational crisis of CRAs by shedding light on main shortcomings, which gained attention during the global 2008-2009 financial crisis. After having established the role of CRAs in the financial industry their impact on governments’ autonomy is examined. Finally, reform options are investigated with a focus on the value of non-governmental CRAs as a potential solution to overcome recognized flaws in the financial sector.

CRAs are “specialists in providing information regarding bond creditworthiness” (Ryan, 2012, p.6) aiming at overcoming information asymmetries between investors and debt...