The Political Economy of Credit Rating Agencies. The Case of Sovereign Ratings

This thesis investigates the social and economic importance of Credit Rating Agencies (CRAs), concentrating on the case of sovereign ratings. By viewing CRAs as an influential institution within the context of neoliberalism and financialization, the thesis offers some new insights regarding the way sovereign ratings are formed and the way they come to affect macroeconomic processes and outcomes. The experience of the European Monetary Union (Eurozone) serves as the case study. The recent and still ongoing European crisis and the flawed institutional structure of the Eurozone make this case study to be of special interest. The thesis consists of three broad parts. The first part sets the background of the thesis. As such it contains some analytical reflections on how to conceptualize CRAs. It also includes a chapter that discusses in detail the institutional arrangements of the Eurozone and the associated stylized facts. The second part consists of two econometric chapters. By employing a dataset based on the original twelve Eurozone countries and on the period from 1999 to 2012, the first chapter decomposes the determinants of sovereign ratings and seeks for evidence of systematically panicked reactions from CRAs. In turn, the second chapter utilizes a panel probit model and investigates the statistical and economic significance of sovereign ratings in explaining episodes of extreme capital flow movements. The third part establishes a two country stock flow consistent model and explores the linkages between sovereign rating movements, the financial market and the constraints for fiscal policy. By separating between a weak country and a strong country, the model shows how following a recessionary shock, the rating downgrade of the weak country can affect the liquidity preference of investors. Such influence deepens the already ongoing recession by amplifying the financial constraints the weak government faces and by forcing it to implement fiscal austerity.