
Contents
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Down the rabbit hole: the counterintuitive world of credit ratings Down the rabbit hole: the counterintuitive world of credit ratings
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Third-party experts, not information brokers Third-party experts, not information brokers
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He who pays the piper does not call the tune: the audience does He who pays the piper does not call the tune: the audience does
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Not “accurate,” just workable: the overriding importance of rating stability and reliability Not “accurate,” just workable: the overriding importance of rating stability and reliability
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Sovereign ratings: the Achilles heel of the rating business Sovereign ratings: the Achilles heel of the rating business
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The role of sovereign ratings in the rating portfolio The role of sovereign ratings in the rating portfolio
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Modeling sovereign risk Modeling sovereign risk
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The bane of market reflexivity and the need for insurance The bane of market reflexivity and the need for insurance
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How to insure sovereign ratings against crises? Enter policy and politics How to insure sovereign ratings against crises? Enter policy and politics
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Policy as the transmission mechanism from shock to crisis: evidence from sovereign methodologies Policy as the transmission mechanism from shock to crisis: evidence from sovereign methodologies
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The technical is political: how “duty of care” breeds political and policy interference The technical is political: how “duty of care” breeds political and policy interference
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What role for ideas in a knowledge industry? What role for ideas in a knowledge industry?
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Studying ratings in action: the empirical evidence Studying ratings in action: the empirical evidence
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2 The business: why do ratings incorporate politics and policy?
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Published:April 2023
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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.
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