Munich Personal RePEc Archive

Bias or ignorance? The politics and economics behind sovereign credit ratings

Dähler, Timo (2020): Bias or ignorance? The politics and economics behind sovereign credit ratings.

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Abstract

Given that sovereign bond markets may be vulnerable to multiple equilibria and self-fulfilling prophecies, a debate exists over whether and in what way credit rating agencies (CRAs) are politically biased and may weaponize sovereign credit ratings. Recent research by Fuchs and Gehring (2017) suggests that CRAs are not biased in favor of countries which are geo-politically aligned with their home country. In this paper, I argue that such a bias exists and that it should manifest empirically once two features of the global economy are controlled for: hidden debt owed to China and the global network of central bank swap line arrangements. To provide support for my argument, I first replicate the results reported by Fuchs and Gehring and then extend the analysis in several ways to account for these two features that have recently emerged in global finance to show that an in-group bias is present across major CRAs.

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