Can the Empire Strike Back? Why Efforts to Restrain Sovereign Ratings Fail

• In Event: Consequences of Economic Crisis

Abstract

Ratings are a central gatekeeping mechanism in financial markets. It has been shown that ratings manifest clear political and policy preferences that make borrowing more expensive for governments that do not conform to those preferences (Vaaler et al. 2006, Barta and Johnston 2019 and 2020). In the wake of the European debt crisis, there was indication that European and American policy makers might push back against the pecuniary constraints thus imposed on them by attempting to reshape the world of sovereign ratings. Yet, initiatives to reduce the gatekeeping role of ratings, to set up not-for-profit agencies with methodologies guided by different principles than that of Moody’s, Standard and Poor’s or Fitch, or to increase competition in the rating market petered out without ever threatening the control of the ‘Big Three’. This paper shows – on the basis of interviews with experts involved in the failed non-profit alternatives, senior management at small competitors, and officials at ESMA and the SEC – that path dependence makes it virtually impossible to break the oligopoly of the rating market even if policy makers are ready to fundamentally overhaul the public regulations that originally cemented the position of the ‘Big Three’. Ratings of the ‘Big Three’ are hard-wired in private regulations, and – just as utility companies – the ‘Big Three’ built an infrastructure (of business connections) that is impossible for challengers to replicate.

Author

• Zsofia Barta, SUNY, University at Albany