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To Judge Leviathan: Sovereign Credit Ratings, National Law, and the World Economy

Published online by Cambridge University Press:  15 July 2005

CHRISTOPHER M. BRUNER  and
RAWI ABDELAL
CHRISTOPHER M. BRUNER
Affiliation:
Harvard Business School
RAWI ABDELAL
Affiliation:
Harvard Business School
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Abstract

Recent decades have witnessed the remarkable rise of a kind of market authority almost as centralized as the state itself – two credit rating agencies, Moody's and Standard & Poor's. These agencies derive their influence from two sources. The first is the information content of their ratings. The second is both more profound and vastly more problematic: Ratings are incorporated into financial regulations in the United States and around the world. In this article we clarify the role of credit rating agencies in global capital markets, describe the host of problems that arise when their ratings are given the force of law, and outline the alternatives to the public policy dilemmas created when ratings receive a public imprimatur. We conclude that agencies designated for regulatory purposes should be required to provide more nuanced ratings exposing their perceptual and ideological underpinnings (especially for sovereigns), and facilitating consideration of alternatives to ratings-dependent regulation.

Type
Research Article
Information
Journal of Public Policy , Volume 25 , Issue 2 , August 2005 , pp. 191 - 217
Copyright
© 2005 Cambridge University Press

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Footnotes

For insightful comments on previous drafts of this paper, we thank Jonathan Kirshner, Debora Spar, Richard Vietor, Louis Wells, David Yoffie, and two anonymous reviewers. We are grateful to Harvard Business School's Division of Research and Faculty Development for supporting this project.