Credit Ratings and Sovereign Debt

The Political Economy of Creditworthiness through Risk and Uncertainty

B. Paudyn

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137302779
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

Bartholomew Paudyn investigates how governments across the globe struggle to constitute the authoritative knowledge underpinning the political economy of creditworthiness and what the (neoliberal) 'fiscal normality' means for democratic governance.

1

Crisis and Control

Whose judgment do we trust and why are questions that have always preoccupied collective action problems and strategic decision-making. For this purpose, game theoretics (see Hollis 1998; Nash 1950; Putnam 1988; von Neumann and Morgenstern 1944) have been widely applied in numerous forms, and across multiple disciplines, to explain various scenarios where interactions depend on some degree of confidence in another actor. Overstretching rationality and an innate calculative capacity of humans to maximize utility through abstract hypothetical tests has proven attractive because, as Duncan Snidal (1985: 25; original italics) contends, ‘the ultimate payoff of game theory is the use of game models to understand different aspects of international politics in terms of a unified theory’. Increasingly sophisticated and precisely formulated models give the impression of game theory as a ‘unifying force in the social sciences…capable of being applied to the understanding of all interactions between conscious beings’ (Howard 1971: 202). So pervasive has formal modeling become – especially in the Anglo-American world – that it has penetrated, to varying degrees, most socio-economic spaces (Power 2004). Stephen Walt (1999: 5) observes how:

Elite academic departments are now expected to include game theorists and other formal modelers in order to be regarded as ‘up to date,’ graduate students increasingly view the use of formal rational choice models as a prerequisite for professional advancement, and research employing rational choice methods is becoming more widespread throughout the discipline.

Irrespective of their accuracy, it is the consistency, comparability and remote calculative capacity – which enable their systematic application – that has elevated quantitative modeling both in terms of reputation and utility.

Accordingly, it should come as little surprise that its alignment with this purportedly ‘scientific’ narrative of risk has proven advantageous to the popularity and practice of credit rating. Similar to game theoretics, sovereign ratings claim to synchronically connect and compare heterogeneous entities (i.e., national economies) through an infrastructure of referentiality that is considered universally applicable. Ratings also reflect the belief that complex and multifarious social phenomena can be distilled into a few basic variables and processed using a battery of quantitative techniques. The more complicated the calculation, typically, the more credence that is vested in the ability of mathematical formulas to capture, divide and solve the problem; and ipso facto the experts equipped to deploy them. Whether this actually yields a ‘better’ outcome is highly debatable; as the dismal performance of Moody’s or S&P attests. Of course, CRAs are not the only ones to subscribe to an orthodoxy that privileges the notion of exogenous economic realities unmediated by the discursive relations in which they are implicated.

Vincent Antonin Lépinay (2011) explores how the expertise of a group of highly educated mathematicians and physicists – commonly referred to as ‘quants’ – is regularly imported into finance in order to help engineer an array of highly complex financial products, such as equity derivatives. What is striking about this is the distinct mentality through which finance is now conceptualized and structured. As Lépinay (2007: 91) comments, these quants ‘come with backgrounds that can make them describe a price as either an equation to be solved or a Brownian motion to be followed’. Adopted from physics – where Brownian motion entails the random movement of minute particles caused by collisions with surrounding molecules – it explores stochastic processes in continuous time. Donald MacKenzie (2006: 60–3) shows how geometric Brownian motion determines fair option prices in the Black-Scholes-Merton model. Together with accounting and actuarial sciences, ‘disembedded and disembodied accounts of finance’ (Langley 2008a: 6) are being advanced as formal modeling – conventionally located in the natural and physical sciences – is routinely being applied to social phenomena.

Now the intention is not to equate credit ratings with game theory or Brownian motion but to provide an indication of how ratings are part of a broader movement within modern finance which subscribes to what Nigel Thrift (1996: 13) refers to as the scientific ‘discourse of transcendental rationality’. Here the economic is portrayed as a supposedly coherent and self-perpetuating metaphysical reality, which precedes its cultural, historical and discursive expressions; in other words, its intersubjective performativity. Not only do such exogenous accounts – with their a priori categories and ontological status – habitually privilege a (positivistic) bifurcation between ‘politics’ and ‘economics’, they also treat risk as a self-evident and monolithic phenomenon, and thus the de facto managerial approach best equipped to deal with these domains (Best 2008; de Goede 2004). Their appetite for quantitatively unearthing a pregiven totality may explain the desire to ‘refurbish’ social inquiry through the prescriptive positivism of the natural sciences and align it with the infallibility of a rationalist-empirical epistemology. Nevertheless, these ‘myths of anteriority and referentiality’ (Maurer 2002: 18) blind them to the severe limitations which they impose on our understanding of social relations when methodological rigor and consistency trump everything else.

Increasingly, this neglect of the historical and discursive constitution of the fields of finance has been effectively critiqued by a burgeoning critical literature (Aitken 2007; Best 2005; Callon 1998; Dean 1999; de Goede 2005; Knorr Cetina and Preda 2005; Langley 2008a; Mitchell 2002; Porter 2005; Watson 2007). My objective is not to reiterate simply what is becoming an ever more established and persuasive refutation of the ‘economism’ (de Goede 2003), and its corresponding universalistic, positivist biases, found in conventional IPE. Nor is my intention to propose a better alternative for assessing sovereign creditworthiness which is untarnished by such inconsistencies and distortions. This is not a policy proposal. Rather the ambition of this book is to demonstrate how, until recently, one significant financial practice has managed to escape the serious scrutiny of both analytical IPE scholarship and, again until recently, most legislative drafters to remain, relatively, under the radar – namely credit ratings – and what consequences this presents. Compared to other financial practices and institutions, such as the banks or the IMF, the cursory political economy analysis that CRAs have received is quite surprising. Yet nowhere, arguably, is this dubious separation, and the ‘referentialist metaphysics’ (Maurer 2002: 18) which it promotes, more visible than in the ratings space. Here the economic is often treated as an unproblematic and incontestable reality. The politics of representation and discursive practices are virtually ignored in favor of normalizing risk models, which help constitute and reinforce this (fallacious) binary opposition as a natural fact of life. ‘Social facticity’ is distorted as an objective material condition through a ‘discourse that is considered to be scientific’ (Foucault 1980: 84).

Rather than attribute this oddity, and corresponding deficit in the literature, to the ‘unique’ or impervious nature of credit ratings themselves, this book argues that it is, in fact, their alignment with and predication on the hegemonic discourse of risk that has made sovereign ratings, simultaneously, a stealth yet salient technology of fiscal government. Ratings are a fixture in a broader periodization of finance based on defendable risk calculus. Intimately linked to the regenerative dominance of the discourse of (quantitative) risk, and its false dichotomy with (qualitative) uncertainty, ratings are the internal forms of governmentality involved in embedding the normalization of this neoliberal narrative in such ways as to insulate it from political interference. Accordingly, this book is not just concerned with problematizing a dubious financial practice but also revealing how its egregious inconsistencies undermine democratic politics by contributing to the imposition of often unbearable socio-political costs on diverse populations around the globe. Through ‘forms of ceaseless control in open sites’ across fiscal and financial landscapes, sovereign ratings serve as the ‘universal language’ that is instrumental in enabling and validating the naturalization of this bifurcation, which not only entrenches but deepens this asymmetric politics of limits (Deleuze 1995: 175).

Utterances, it should not be forgotten, are mostly deliberate – though their consequences may be unintended. Ratings, therefore, lack any innate self-destructive properties which predetermine their effects. Repeatedly disassembled into a catalogue of analytical categories and subject to individual assessment gives the impression that politics and economics are, indeed, autonomous domains. In other words, the ubiquity of ratings helps them perform and instill an understanding of the economic and political as essentially two distinct spheres by modeling and calculating them as such. Compartmentalization has a depoliticizing effect on the constitution of the political economy of creditworthiness; thereby reiterating the salience of a bifurcation that positions the economy above, and beyond, politics.

Risk also mediates the representational ‘reassembly’ of these components as it makes the connection and comparison of dispersed and diverse national ‘units’ purportedly feasible. Through risk’s aggregating character, the economy appears ‘singular and monolithic by virtue of the convergence of certain kinds of processes and practices that produce the “effect” of the knowable and unified economy’ (Butler 2010: 147). Its commercialization cements this neoliberal market rationality. But whether predictive positivism of this sort, however, helps us acquire an ‘objective’ account of fiscal behavior is a misplaced enquiry. It is the intersubjective character of finance which continuously translates these calculative knowledges and expert representations into material conditions, such as prices and capital, through discursive practices like ratings (de Goede 2006: 11). Never is there one ‘true’ state of sovereign creditworthiness to capture and calculate.

In order to understand how ratings exercise a certain degree of control over the constitution of creditworthiness, without succumbing to economic reductionism or false dualisms, we require the proper analytical apparatus that can elucidate how they serve to create the conditions and subjectivities which help to validate the specific (neoliberal) politics of limits underpinning fiscal relations. This chapter introduces the conceptual themes and analytical ‘tools’ with which the territory of creditworthiness is excavated in the subsequent chapters. First, however, a brief historical context of CRA ascendance informs us of their implication in some of the most severe fiscal and financial crises in recent memory. Building on, and going beyond, Tim Sinclair’s (2005) influential analysis of their evolution, these comments mainly focus on the new developments in the epistocratic/democratic conflict and the act of sovereign rating. Although the allegations of major offences against Moody’s or S&P date back to the 1990s, arguably, it is the 2007–08 ‘Great Recession’, and subsequent European sovereign debt crisis, which have again illuminated the most egregious elements of ratings to evoke a vociferous backlash and regulatory response.

Once familiar with the temporal dimensions of this problematic, the principal conceptual themes informing the rest of the analysis are discussed: authoritative knowledge; performativity of calculative spaces and subjectivities; and the politics of resistance and resilience. Drawing on Foucauldian-inspired scholarship into the power/knowledge nexus, we begin to consider how, as socio-technical devices of control, ratings help constitute spaces of calculability through the deployment of authoritative knowledge. Action and authority combine to form a network grid which inculcates neoliberal rationalities and techniques in the constitution of calculative subjectivities as, in the words of Pat O’Malley (2000: 466), ‘the enterprising-prudent self’. Governments are envisioned as a collective of entrepreneurial subjects entrusted with the responsibility of prudently managing their fiscal books. Such modulation of ‘deviant’ fiscal conduct ‘at-a-distance’ is intended to induce the internalization of self-regulation as ratings serve to facilitate the ‘translation’ of diverse national problematizations into mutually corresponding, and potentially reinforcing, global ones (Latour 1987). Adherence to the programmatic inherent in ratings ‘enables and opens up new possibilities for its subjects’, while simultaneously ‘[restraining] these subjects as they are made subjects of a certain calculative and disciplinary regime’ (Haahr 2004: 209).

Dispersed fiscal spaces/relations become connected as the performativity of sovereign ratings facilitates the ‘apparent transformation of the randomness of distant events into the near-to-hand statistical, intensive, “accelerated transport” of information’ (Pryke and Allen 2000: 281; quoting Virilio 1991: 101). Now whereas Michael Pryke and John Allen fail to unpack the black box of technical expertise enabling the derivatives’ production of a new monetary imaginary, this book dissects the very analytics of ratings – the constituent components and processes involved in the construction of a credit score – to show how the specific appropriation and deployment of risk and uncertainty gives the synchronic effect of compressing and standardizing national political economies. Unfortunately, the neat consistency and systematicity of such quantitative modeling faces fierce opposition when applied to the messy budgetary relations of heterogeneous political economies. Insofar as these stabilizations are produced, however, the fragility of their performation leaves them vulnerable to disruption and ‘breakdown’ (MacKenzie 2006). Excessive austerity and a crippling adherence to a neoliberal programmatic can go too far and impose that intolerable economic burden on the people (Moody’s Investors Service 2008a: 6). Here the politics of resistance/resilience trigger violent opposition – visible across the periphery of Europe – and national efforts to reclaim fiscal sovereignty. Diagnosing the act of rating along these ‘lines of fragility’ (Foucault 1983/1998: 202) enables the potential repoliticization of this discourse and, possibly, new initiatives for correcting the growing asymmetry between epistocracy and democracy.

Emerging sovereign bond markets

Without doubt, Moody’s and S&P’s entrenched historical position is a significant factor contributing to their stature and central role in defining the political economy of creditworthiness. Although the rise and proliferation of risk management has had a pronounced catalytic effect of enhancing the ubiquity and authoritative capacity of ratings, their evolution dates back to the rise of market surveillance mechanisms in the mid-nineteenth century. In his analysis, Sinclair (2005: 23) documents how various crises in the United States, such as failed railroads and property misadventures, became a catalyst for the demand and dissemination of enhanced information on the health of American business and infrastructure. Henry V. Poor was one of the first to systematically cater to this growing hunger for more precise accounts with the 1860 publication entitled History of the Railroads and Canals of the United States of America (Standard & Poor’s 2011a). Shortly after that, in 1868, his Manual of the Railroads of the United States was released, which showed ‘their mileage, stocks, bonds, costs, earnings, expenses, and organizations; with a sketch of their rise, progress and influence’ (Poor 1868).

John Moody soon entered the fray with his 1900 Manual of Industrial and Miscellaneous Securities (Moody’s Investors Service 2002). His industrial statistics included information about the stocks and bonds of financial institutions and government agencies, in addition to data on manufacturing, mining and utilities. After only two months, the publication had sold out (ibid.). Unfortunately, lacking adequate capital to sustain his business during the stock market crash, in 1907, Moody was forced to sell his company. Nevertheless, in 1909, Moody’s Analyses of Railroad Investments would mark his return and the evolution of his business to include an analysis of the value of securities.

With a host of European (e.g., Germany, Greece, Hungary, UK) and developing Latin American (e.g., Brazil, Columbia, Mexico) economies beginning to default during the Great Depression of the 1930s, bond markets became American dominated and preoccupied with US municipalities and leading industrial firms (Sinclair 2010: 97). Foreign sovereign bonds were regarded with suspicion and their American issuance was greatly curtailed, if not virtually ceased, until around 1990. Widespread rescheduling made sanctioning individual offenders all the more difficult (Eichengreen and Portes 1989: 19). Following the Great Depression, the rating space consolidated as new issues required a rating in order to be sold.

Post World-War II repressive shocks and regulation, such as capped interest rates and higher bank reserve requirements, signaled a movement towards capital controls; and fewer sovereign ratings. Balance-of-payments deficits ballooned as reconstruction costs soared, prompting states to stymie the flow of capital abroad. The Bretton Woods monetary system sought to restrict capital mobility in the effort to stabilize the pegged, but adjustable, exchange rate regime. But its lack of success was not just predicated on the exodus of capital that governments feared. Randall Germain (1997: 151) notes how reserve requirements were deployed to address speculative capital inflows as well. Among the major sovereigns, (West) Germany imposed a 50 per cent fee on the mark-dominated accounts of foreigners in 1969 and Japan pursued a similar capital control strategy until 1980. In short, pressures were exerted to discourage international capital flows.

That said, similar to Germain, Barry Eichengreen (1996: 93) is correct to question both the scope and effectiveness of these programs as ‘foreign investment occurred despite, not because of, the implication of Bretton Woods for international capital mobility’. Drawing on interest rate data on domestic and external debt issues, Carmen Reinhart and Kenneth Rogoff (2008: 7) confirm that their relative parity during the period was indicative of the persistent effect of markets on the price of debt; irrespective of government interventions. Since domestic liabilities comprise the majority of outstanding public debt for developed economies, defaults allowed states to channel desperately needed resources to domestic demands and investments. Consequently, the pronounced retrenchment in the volume of portfolio lending had a tremendous impact on capital markets. Together these contingencies contributed to what Sinclair (2005: 26) identifies as an ‘era of rating conservatism’ where ‘sovereign rating coverage was reduced to a handful of the most creditworthy countries’.

One of the consequences was a visible movement from bond to bank financing. In this environment, rescheduling of debt was an easier and preferable option to outright default. Thus, Eichengreen (2003: 81) observes that by the 1970s:

Most sovereign debt was held in the form of medium- to long-term syndicated bank loans. Bank syndicates had limited numbers of participants, facilitating communication, collective action, and the application of moral suasion by governments, while covenants attached to these loans, such as sharing clauses that required an investor initiating legal action to share the proceeds with other creditors, discouraged disruptive litigation.

Where necessary, the US government exerted pressure on the banks for a timely res...