The business: why do ratings incorporate politics and policy?

Abstract

Abstract This chapter clarifies what rating agencies do and why rating stability and reliability are key to retaining market share in the rating market. It explains that while sovereign ratings play a pivotal role in the stability and reliability of the entire rating portfolio, they are also particularly vulnerable to failures that threaten rating agency credibility. The chapter cites the Big Three’s official methodologies as evidence that sovereign ratings consider politics and policy in judging the willingness and ability of governments to prioritize the prompt restoration of fiscal balance in economic distress, in order to adjust ratings for the likelihood that, in the event of unexpected economic shocks, the government might fail to cut spending and raise taxes to forestall market panic that leads to rating failures.