The score: how do ratings correlate with politics and policy?

Abstract

Abstract This chapter presents a quantitative analysis of the relationship between rating scores and politics and policy, mapping out the pattern of rating penalties and rewards on particular political and policy choices. This pattern is more consistent with the logic of insurance than with neoliberal orthodoxy. Ratings are significantly lower in the presence of generous entitlement systems, heavy personal income and consumption taxes, checks and balances and left and center governments. Spending on social services, public employment, and corporate taxation have either neutral or positive effects on ratings. The examination of the reaction of bond yields to the same variables demonstrates significant differences in how investors and rating agencies treat politics and policy, but rewards and penalties on certain political and policy choices enter into bond yields via ratings.