Global financial orders and credit rating agencies: disruptions and adaptations

MACHADO, PEDRO LANGE

doi:10.1590/0101-31572025-3599

ABSTRACT

This paper addresses the possible disruption of the global financial order (GFO) based on the behavior of S&P Global, Moody’s and Fitch Ratings, century-old rating agencies, in face of three potentially disruptive crises: the 2008 global financial crisis, the Covid-19 pandemic and the climate breakdown. The main argument is that, historically, these agencies have adapted to the GFOs in force, mirroring their institutional and ideological parameters and thereby reflecting international tendencies. Based on an institutional historical analysis and in light of the behavior of the agencies in the crises above, it calls into question the GFO transition discussed by scholarship.

KEYWORDS:
International financial order; credit rating agency; 2008 global financial crisis; Covid-19 pandemic; climate crisis

RESUMO

O artigo aborda a possível disrupção da ordem financeira global (OFG) à luz do comportamento de S&P Global, Moody’s e Fitch Ratings, agências de rating centenárias, diante de três crises potencialmente disruptivas: a crise financeira de 2008, a pandemia de Covid-19 e a crise climática. O argumento é que, historicamente, as agências compuseram as OFGs vigentes, refletindo seus parâmetros institucionais e ideológicos e, assim, indicando tendências internacionais. Com base em uma análise histórica e institucional e à luz das ações das agências nas três crises indicadas, a pesquisa põe em xeque a transição de OFG discutida pela literatura.

PALAVRAS-CHAVE:
Ordem financeira global; agências de rating; crise financeira de 2008; pandemia de Covid-19; crise climática

1. INTRODUCTION

Part of the scholarship on stages of capitalism considers that a disruptive crisis of the global order is underway. Starting with the 2008 global financial crisis and passing through the crises of the Covid-19 pandemic and the environmental challenges posed by global warming, the order based on financial globalization might have entered a period of crisis of legitimacy, giving rise to internal and external contestations, which take shape in different ways worldwide (e.g., Lake, Martin & Risse, 2021; Nölke, 2017, 2022; Saad-Filho & Feil, 2023). In this process, the financial dimension of the global order has received little attention, despite being one of its bedrocks (Nölke & Petry, 2022). This is even more puzzling given the scholarship’s frequent diagnosis that the ascending order should be marked by a more active role of the State in managing the economy and controlling international capital flows (e.g., Nölke & May, 2019; Sato, 2012).

This research addresses this issue by inserting the credit rating agencies (CRAs) into this debate. S&P Global Ratings (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch) are century-old companies whose histories run through the different international orders that have structured global capitalism. Currently, the Big Three, as they are known, are widely recognized as relevant players in global economic and financial governance, despite the private nature of their activities (e.g., Sinclair, 2005, 2021; Paudyn, 2014; Barta & Johston, 2023). Therefore, looking at their modus operandi can offer insights into the history of capitalism and its trends. Thence, the questions that guide this research: How have the different global financial orders of capitalist history reflected in the modus operandi of the CRAs? What can be inferred from the CRAs’ behavior about the (possible) disruption of the financial order in force between the end of the 20th century and the beginning of the 21st century?

To answer these questions, this paper aims to examine how the CRAs have integrated the different orders that run through their history and assess the possible disruption of the current global order based on the behavior of the Big Three. It argues that historically the CRAs have played a role in shaping the parameters of the global financial orders in force, mirroring their institutional and ideological foundations and reflecting international tendencies. Thereby, it shows that the alleged disruptive crisis of the order of financial globalization has not produced relevant impacts on the modus operandi of S&P, Moody’s, and Fitch. This suggests that this disruptive moment, if existent, may still be in an early stage, and the CRAs should be a powerful obstacle to its concretization once their actions support the declining order.

This argument develops in two steps. The first draws on a historical-institutional analysis of the global financial orders (GFOs) that run through the existence of the CRAs: the gold standard order, the Bretton Woods order, and the order of financial globalization. The adaptation of the CRAs to each of these GFOs is illustrated mainly by the role played by the sovereign rating¹ in the businesses of S&P, Moody’s, and Fitch, as well as by State’s regulations on their activities. The second part, focused on examining the agencies’ behavior in the face of the possible disruption of the current GFO, looks at the impacts of three critical events on their modus operandi: the 2008 global financial crisis, the Covid-19 pandemic, and the climate crisis posed by global warming. This analysis resorts to the sovereign rating methodologies, some of CRAs issued ratings, and the regulations imposed on their actions, while both steps extensively use the scholarship’s findings on the concerning issues.

This research makes three main contributions. First, it contributes to the scholarship on stages of capitalism by furthering its dialogue with insights from International Political Economy (IPE) studies on the CRAs. Second, conversely, it contributes to advancing the research agenda around the CRAs, since it sheds light on the interplay between their modus operandi and the structure that conditions it, i.e., the GFO. Third, it helps to understand better three recent crises that have impacted global capitalism (the global financial crisis of 2008, the Covid-19 pandemic, and the climate crisis) from the actions and reactions of the Big Three to them.

This article is structured in four sections in addition to this introduction. Section 2 conceptually establishes what should be understood by a global financial order and offers an overview of the GFOs that have run through capitalist history, in order to build the context in which the argument develops. Section 3 examines how the CRAs have integrated the changing GFOs, based on the different institutional and ideological circumstances prevailing over their centenary history. Section 4 analyzes the possible disruption of the order of financial globalization based on CRAs’ behavior in the face of the 2008 global financial crisis, the Covid-19 pandemic, and the climate crisis. The last section concludes the article, reflecting on how the achieved results support the advanced argument.

2. THE GLOBAL FINANCIAL ORDERS

The crisis of the global order in force from the last quarter of the 20th century has been the subject of debates in the literature on stages of capitalism and part of it claims that we are facing a disruptive moment (e.g., Nölke, 2017; Nölke & May, 2019; Lake, Martin & Risse, 2021). As noted by Nölke and Petry (2022), however, the financial dimension of the international order is an arena constantly neglected in research on this issue, although it constitutes one of the bedrocks of the global orders in capitalist history. This section thus offers a brief literature review that allows the conceptualization of a global financial order, which is followed by a systematization of the GFOs observed since the end of the 19th century.

Although the periodization of capitalist history has been the subject of different theoretical schools (Nölke & May, 2019), there is still a gap when it comes to a definition of global financial order. When examining the different international economic orders of global capitalism, Sato (2012), for example, notes their composition by different international regimes: a commercial regime, a monetary regime, and a financial regime². Hence the functionality of the classic definition offered by Krasner (1982, p. 186), for whom ‘regimes can be defined as sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations’. When seeking a concept from the literature that addresses different international orders, Nölke and Petry (2022, p. 5) meet the definition of Krasner (1982) when considering that ‘an international order implicitly consists of three basic elements: international institutions, domestic features and the stream of interactions across borders’. Hence the imperative to study them based on their “underlying ideas, power structures, and institutions”.

Based on these considerations, this research addresses the different GFOs of capitalist history regarding their sets of underlying norms, practices, institutions, and power structures at the international financial dimension, as well as their consequences for the policy space of national governments. Scholarship converges on the diagnosis that there are three different international orders from the last decades of the 19th century to the potential disruptive moment in which we live, which may give rise to a new order (e.g., Nölke & May, 2019; Sato, 2012). Thus, between the last decades of the 19th century and the Great Depression, what is known as the gold standard international order prevailed. From the end of World War II until the crisis of the 1970s, the Bretton Woods order was in effect. In the interval from the 1980s to the current supposedly disruptive period, we have experienced the hegemony of a neoliberal order structured on financial globalization and the financialization of capitalism (henceforth international order of financial globalization). The table below portrays this systematization, while the course of this section examines the main characteristics of these international financial orders.

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Table 1
Overview of the international financial orders and their characteristics

In the global order of the gold standard, the economic management of States was dictated by the equilibrium of their balance of payments, with the value of their currencies being proportional to the accumulated gold reserves. Under the influence of the quantitative theory of money, if deficits (surpluses) were registered, restoring balance would require adopting deflationary (inflationary) policies until the convertibility of the national currency to gold was adjusted. In an international environment of free capital flows, this regime was supported by the confidence of financial agents in the commitment of Central Banks - or of the institution that then performed a similar function - to the system’s functionality. In theory, this would make the international financial flows perform a stabilizing role for the national economies integrated into the GFO (Eichengreen, 2008; Sato, 2012).

This system collapsed at the end of the 1920s, when the Great Depression and the political and social transformations that followed it, culminating in the Second World War, made it unsustainable. As foreshadowed by the New Deal in the United States, the order architected in Bretton Woods was ideologically supported by Keynesianism, being based on State control over the financial system through regulations and restrictions on international financial flows. This enabled a fixed exchange rate monetary regime, to the benefit of domestic policy space for governments to implement their welfare states and pursue their development strategies, which was critically relevant in the Cold War context. Internationally, the disbalances of the system would be remedied by the action of the International Monetary Fund (IMF) and the World Bank (Helleiner, 1994; Sato, 2012; Kuttner, 2018).

The Bretton Woods order was functional until the late 1950s, when the circumstances that sustained it began to run out (Helleiner, 1994). It is not intended to examine here the complexities of this context, in which there was an increase in competitiveness in international trade and the configuration of the Eurodollar market. Still, it is worth mentioning that, throughout the 1960s, maintaining the parity between the dollar and gold within the parameters established at Bretton Woods proved to be unfeasible, so that, in 1971, the American government decided to abandon this commitment. Amid the stagflation crisis of the advanced economies, the 1970s then witnessed the loss of credibility of the Keynesian framework and the neoliberal ideological offensive (Helleiner, 1994; Kuttner, 2018).

Starting in the United States, the movement to deregulate the financial system soon became an international trend, laying the foundations for a new global order under the auspices of neoliberalism (Krippner, 2011). Financial globalization gained momentum throughout the 1980s, with governments worldwide adhering to a floating exchange rate system, to the detriment of their policy space (Rodrik, 2012). As institutional frameworks adapted to the imperatives of globalization, ‘the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies’ (Epstein, 2005, p. 3) gave impetus to the process of financialization of capitalism. In a context marked by a speculative dynamic in capital markets and prone to systemic crises (see Kindleberger & Aliber, 2005), the growth of economies integrated into the order of financial globalization was hampered (Stockhammer, 2008), while social inequalities increased (Milanovic, 2016). This scenario is particularly constraining for developing countries, which suffer the negative effects of their asymmetrical integration into a global financial order structured on a highly hierarchical international monetary system, in which their currencies play a peripheral role and are subject to the structural power of the United States (De Conti, Prates & Plihon, 2014; Cohen, 2015).

This section does not aim to offer a detailed examination of the IFO of financial globalization. But it is worth noting that the crisis of democracy pointed out by scholarship (e.g., Rodrik, 2012; Streeck, 2014) is often associated with the loss of autonomy of governments in the face of the need to gain the financial market’s confidence. This happens to the detriment of citizens’ demands, which are often hindered by the imperatives of fiscal austerity and depoliticization of economic policy. However, with the global financial crisis of 2008 and its aftermath, this GFO seems to have entered a crisis of legitimacy (Sato, 2012). At the same time, it began to be contested by emerging economies, which have challenged the power structures embedded in the global financial architecture (Nölke & Petry, 2022). In the face of this disruptive scenario, scholarship has speculated on the configuration of a new order, marked by a more active role of the State in economic management and the international financial system (Nölke, 2017; Nölke & May, 2019).

3. THE CENTENARY HISTORY OF THE RATING AGENCIES ACROSS THE GLOBAL FINANCIAL ORDERS

In light of the presented GFOs, this section examines how the CRAs have adapted to and helped cementing the different institutional and ideological parameters of the gold standard, Bretton Woods, and financial globalization orders. As noted in the introduction, S&P, Moody’s, and Fitch are century-old companies: Moody’s was founded in 1900, followed by Poor’s Publishing Company, in 1916, by Standard Statistics, in 1922, and by Fitch Publishing Company, in 1924 - with the merger between Standard and Poor’s occurring in 1941. Thereby, the CRAs’ modus operandi mirrors the prevailing orders, reflecting their disruptions and transformations. Given the variety of ratings the agencies offer, the following examination will focus mainly on the sovereign rating, which has been part of the CRAs’ business since the first years of their operations. However, the analysis is not restricted to it, as seen in the following paragraphs.

During the gold standard order, the creation of the CRAs occurred in the United States due to market demands. In the context of the American bond market’s expansion, the sector for bonds’ creditworthiness analysis was promising, given the informational asymmetry between bond issuers and investors. Hence, in 1909, John Moody published the first rating manual on bonds issued by American railroad companies (Sinclair, 2005; White, 2013). The first sovereign ratings were published in 1918, covering nine foreign countries: Argentina, Canada, Cuba, the Dominican Republic, France, Japan, Norway, Panama, Switzerland, and the United Kingdom. In the following years, Poor’s, Standard, and Fitch would enter the business, so that, until 1929, 120 sovereign bonds were rated by the four CRAs (Gaillard, 2012). This meant that almost 60% of the existing countries in the period were rated by the CRAs, a level that, at least until the first two decades of the 21st century, would not be reached again (see Figure 1).

Figure 1
Overview of sovereign ratings across CRAs’ history

However, the 1930s was a time of disruption for the sovereign rating business, given the collapse of the gold standard order. With the wave of sovereign defaults and the trauma generated by the Wall Street crash of 1929, which arose from a deregulated financial system, the dynamics of the bond market became the center of attention of State regulators in the United States (Krippner, 2011). In 1934, for example, the Securities and Exchange Commission (SEC) was created with the mission of regulating the bond markets. In the following decades, control of the international capital flows, one of the foundations of the Bretton Woods order, led to the near extinction of CRAs’ branch of sovereign ratings (Gaillard, 2012; De Souza, 2015).

On the other hand, the New Deal and the ascension of the Bretton Woods order represented a watershed for the power the CRAs would acquire in the following decades. This is because, during this period, their ratings got entangled with many financial system regulations established by regulatory bodies in the United States. As White (2013) notes, between the 1930s and 1970s, regulators gradually introduced the use of ratings in the prudential regulation of banks, insurance companies, and pension funds, which began to have a legal obligation to compose their portfolios only with assets rated as investment grade by the ‘recognized rating manuals’ of S&P, Moody’s and Fitch. As a result, the use of ratings ceased to be a voluntary practice of financial agents, acquiring the force of law and guaranteeing the CRAs a captive audience for their services (White, 2013).

This contributed to gestate the power and relevance of the CRAs in the global financial order that took shape in the wake of the 1970s crisis. With financial globalization and neoliberal hegemony, the bond markets acquired an unprecedented dynamism in capitalist history. As financial disintermediation allowed national governments easier and cheaper credit, the CRAs’ branch of sovereign ratings reinvigorated, and they began to rate an increasing number of Sovereign bonds (Gaillard, 2012; De Souza, 2015).

However, the interplay between CRAs and national governments has gone beyond the sovereign ratings in the order of financial globalization. Endowed with structural power and epistemic authority in the financial markets, S&P, Moody’s, and Fitch became private authorities in global financial governance, guiding the configuration of countries’ institutional framework (often in line with precepts of the neoliberal orthodox agenda) and advising governments on which policies to adopt to improve their ratings (Sinclair, 2005; Paudyn, 2014). Thus, by publishing reports and press releases, they advocate for implementing specific policies aligned with the orthodox agenda defended by the financial market, which inevitably has repercussions on national political processes. More than that, studies show that the CRAs tend to punish or reward countries through ratings based on the political ideology of their governments and act to influence electoral races (e.g., Barta & Johnston, 2017; Vaaler, Schrage & Block, 2006; Machado, 2022). More vulnerable to their actions, developing countries and emerging economies are the ones that suffer most from the consequences of this modus operandi (Block & Vaaler, 2004), since CRAs’ actions end up reinforcing and exacerbating the financial and monetary asymmetries of their integration to the financial globalization GFO (Machado, 2023). This is probably why developing countries are proposing a series of initiatives aimed at reducing the influence of the Big Three on their economies, as is being proposed by the Brics (Helleiner & Wang, 2018), China (Bush, 2021), and the African Union (Reuters, 2023), for example.

Under the global order marked by the financialization process, nevertheless, the role of gatekeeper of States’ access to the financial resources available in the sovereign debt market is just one among many CRAs’ prominent functions. Also, for companies and subnational governments, for example, obtaining good ratings is highly consequential for their balance of payments. In addition, in the structured finance markets, S&P, Moody’s, and Fitch have become central players in the manufacture of financial products (Sinclair, 2021) and in the dissemination of the calculative practices that underlie the financial network that connects banks, institutional investors and a myriad of non-bank financial institutions (Besedovsky, 2018). No wonder, in the wake of the 2008 financial crisis, the Big Three became the center of attention of governments and State regulatory bodies (Sinclair, 2021), as will be seen in the next section.

Examining the CRAs’ modus operandi in the light of the different global financial orders that run through their histories allows, therefore, to understand how they have helped shaping the institutional and ideological parameters prevailing in the various stages of global capitalism. In the order of the gold standard, the prevailing laissez-faire led to the creation of S&P, Moody’s, and Fitch, raising them to a prominent position in the bond markets of the United States, where the innovative business of sovereign rating was created. The Bretton Woods order, however, significantly restricted this branch of activity due to international restrictions on capital flows. However, state regulations on the financial sector also served to crystallize the relevance of the CRAs in the US financial system. Subsequently, with the rise of the financial globalization GFO, this relevance was projected globally, making the CRAs a key player in the global financial architecture in the context of the financialization of capitalism. The following table systematizes this argument.

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Table 2
The international financial orders and the CRAs’ business

4. THREE CRISES AND THE RATING AGENCIES

Once understood how the GFOs’ transformations influenced the modus operandi of the CRAs, we can now turn to the effects of the alleged ongoing disruptive crisis on the behavior of S&P, Moody’s, and Fitch. As shown in section 2, this critical moment was inaugurated with the global financial crisis of 2008, to which the Covid-19 pandemic and climate crises were added. In the face of these events, are there signs that support the scholarship’s diagnosis about the configuration of a new GFO, in which the States would play a more significant role in the economic management and control of international financial flows? To answer this question, the following three subsections examine the effects of the 2008 financial crisis, the Covid-19 pandemic, and the climate crisis on CRAs’ actions, which may provide answers in this regard.

4.1 The global financial crisis of 2008

In 2008, the financial crisis that spread globally from the US financial system became a symbol of the dangers and instabilities engendered by financial globalization and the financialization of capitalism. With the failure of banks, the collapse of national economies, and the socialization of the losses caused by the speculative dynamics of shadow finance, the ideological parameters of the neoliberal financial order seemed to be put in check. This led to the academic debate around the GFO transition process towards a period of more significant State control over the financial system.

The CRAs were closely involved in triggering the crisis and in its aftermath. First, due to flaws in the ratings of collateralized debt obligations, mainly those backed by risky subprime mortgages, which constituted the epicenter of the crisis. As observed by Sinclair (2021), this participation is particularly critical for the CRAs because they acted as advisors in the manufacturing of these securities, leaving aside their historical role as impartial and distanced ‘judges’ from their rated objects. This resulted in issuing the highest investment grade (AAA) to structured finance products whose default would nearly collapse the international financial system (Sinclair, 2021). Second, in the context of the sovereign debt crisis of countries on the eurozone periphery - the PIIGS: Portugal, Ireland, Italy, Greece, and Spain - that took place in the following years. On this occasion, the CRAs promoted massive downgrades, which aggravated the socioeconomic collapse in force (Paudyn, 2014) and raised questions about their modus operandi and the quality of their ratings.

As a result, they faced lawsuits in the United States, being fined millions of dollars, and saw their actions under intense public scrutiny and new regulations by States and international organizations (Sinclair, 2021). For example, the Dodd-Frank Act instructed the SEC to establish an Office of Credit Ratings to monitor the CRAs, forcing them to be more transparent in their rating processes and client relationships (Sec, 2018). Shortly after, the European Securities and Markets Authority (ESMA) required the CRAs to periodically report on various aspects of their operations, such as rating methodology, governance, rating deadlines, and internal policies and procedures. In addition, it established specific guidelines for the disclosure of ratings, which may lead to the application of fines if not complied with³ (Esma, 2019). Added to this was the reinvigoration of the ‘Code of Conduct Fundamentals’ established by the International Organization of Securities Commissions (IOSCO) with the goal of improving the integrity of the rating process (Iosco, 2015).

Against these retaliations and under an alleged crisis of legitimacy, it became commonplace to predict the loss of relevance of the CRAs in the global financial order. But that is not what came to happen. Conversely, the Big Three remain as or more important than before in the international financial system (Binici, Hutchison & Miao, 2018). The reasons for this have been the subject of IPE studies. For Sinclair (2021), two aspects must be taken into account in this regard: on the one hand, there is no other institution that can better fulfill the role played by the CRAs in the financial infrastructure; on the other hand, it is convenient for financial agents that only a few judgments and opinions be consequential in the capital markets, which favors the resilience of the century-old CRAs in this environment. In addition, state regulations on their activities cement the CRAs’ relevance in the GFO as they build on their already existent role in the private governance of financial markets (Kruck, 2016).

Furthermore, despite these regulations, the CRAs’ business model remains the same, as well as their rating process, which does not suffer any interference from governmental or international regulators (Cash, 2019; Sinclair, 2021). This means that the 2008 financial crisis and its aftermath did not produce any change in the agencies’ modus operandi regarding their ratings. On top of that, apart from the resilient relevance of the ratings issued by S&P, Moody’s, and Fitch, scholarship has observed new interferences of the Big Three in national political and economic processes during the second decade of the 21st century, always to promote the orthodox agenda defended by investors, which further deepens the financialization of capitalism (e.g., Machado, 2023; Paudyn, 2014). On the other hand, they continue to oppose any policies that conflict with the ideological foundation of the financial globalization GFO in their reports and press releases, often under the threat of downgrades (e.g., De Conti, Borsari & Martínez, 2022).

Finally, the global financial crisis had little impact on the profitability of S&P, Moody’s, and Fitch as companies nor their number of employees. When analyzing these data, Mihaelajméno (2015) observes a transitory negative effect for the S&P and Moody’s profit margin between 2007 and 2008, with a subsequent recovery until reaching higher levels than those that preceded the crisis. In Fitch’s case, such a damaging effect never came to happen. As for the number of contractors, only Moody’s had its growth affected, also temporarily, during the acute period of the crisis.

Overall, therefore, the global financial crisis of 2008 served to highlight the conflicts of interest and failures underlying the CRAs’ operations. This put them in the dock and under the scrutiny of regulators, which increased oversight of their activities and imposed them millionaire fines. Contrary to expectations, however, this had little influence on their modus operandi or the role they continued to play in the global financial order.

4.2 The Covid-19 pandemic

The Covid-19 pandemic brought the expectation that the disruption of the financial globalization GFO, gestated since the 2008 crisis, would finally consolidate (e.g., Nölke, 2022). After all, the economic impacts associated with the pandemic seemed to require a review of the practices prompted by the institutions responsible for global financial governance, whose orthodoxy was already being questioned by academics and policymakers. Indeed, a change can be noted, for example, in the recommendations of the IMF, which began to emphasize the need for fiscal expansion and public investments to overcome the crisis (IMF, 2020, 2021). How has this trend been reflected in the modus operandi of the CRAs?

In the context of the pandemic, the deterioration of States’ economic and fiscal fundamentals worldwide and the need for public indebtedness in the bond markets to finance the policies necessary to contain the economic and health crisis brought S&P, Moody’s, and Fitch back to the center of attention. On the one hand, there was the fear that the pro-cyclicality of their actions would contribute to worsening financial instabilities, as had occurred in the periphery of the eurozone in the wake of the financial crisis of 2008 (Sec, 2020; Tran et al., 2021). On the other hand, CRAs’ discursive pressures could constrain governments to remain aligned with the austerity agenda advocated by the investors and their echo chambers, going against the measures demanded to tackle the health and economic crises (De Conti, Borsari & Martínez, 2022).

These expectations were supported by the absence of any significant change in the CRAs’ methodology for formulating sovereign ratings since the preceding crisis⁴. Hence, given the centrality of the sovereign rating to the fiscal response of governments to tackle the covid crisis (Benmelech & Tzur-Ilan, 2020), the chair of the ESMA, Steven Maijoor, went public to state that he was watching over any irresponsible behavior by the agencies (Reuters, 2020). Against this background, a puzzling situation developed: as noted by Griffith-Jones and Kraemer (2021), although the advanced economies suffered much more severe impacts from the crisis (in terms of GDP contraction and an increase in the debt/debt ratio, GDP) when compared to developing countries, these were considerably more penalized by downgrades than the former. Conversely, ‘if upgrades during the period under investigation are included in the count, the “net downgrades” disappear altogether. S&P and Moody’s even had net positive (!) rating actions for advanced economies during the most ferocious peacetime recession in living memory’ (Griffith-Jones & Kraemer, 2021, p. 4).

The different treatment given by the CRAs to developing and advanced economy countries remains a puzzle to be understood by future research. However, it may be clarified by one of the many conflicts of interest that characterize CRAs’ activities. This is because, in their interplay with advanced economies, the CRAs deal with the constant threat that regulations on their activities might be imposed by governments that feel harmed by rating actions. As peripheral countries do not wield this power, the CRAs are more comfortable downgrading their bonds and making discursive threats. On the other hand, they tend to be more cautious when interacting with governments of advanced economies, given the potential reprisals (Manns, 2015). In fact, in the context of the pandemic, the discursive pressures for the implementation of an orthodox economic policy, often associated with threats of a downgrade, were much more evident in CRAs’ behavior towards peripheral countries, to the detriment of their policy space (De Conti, Borsari & Martínez, 2022).

Tran et al. (2021) assess the CRAs’ performance during the Covid-19 crisis as ‘business-as-usual’. This conclusion derives from observing the timing of the rating actions carried out, which did not repeat the precipitations that occurred in the context of the insolvency crisis of the PIIGS countries in the eurozone years before when their downgrades were heavily criticized by regulatory bodies and governments. However, when examined in the light of the possible GFO crisis, the diagnosis of ‘business-as-usual’ takes on a new meaning: the pandemic crisis does not seem to have influenced the modus operandi of the rating agencies, whose actions remain central for States’ access to the financial resources available in the capital markets, with the same imperatives of creditworthiness.

4.3 The climate crisis

The third triggering event of the GFO’s disruption is global warming resulting from the emission of greenhouse gases by human action. Efforts for its mitigation and for the economic adaptations necessary to comply with the Paris Agreement and the sustainable development goals (SDGs) established by the United Nations call for the action of financial system’s actors, which have been striving to promote investments aligned with environmental challenges in the scope of green finance (Berrou, Dessertini & Migliorelli, 2019). How do the CRAs fit into this trend?

Before addressing this dimension of S&P, Moody’s and Fitch’s modus operandi, it is worth noting the classification of different approaches to green finance proposed by Dziwok and Jäger (2021). According to their typology, there are three forms of green finance. First is a neoliberal form that bets on market solutions to deal with the environmental crisis. In this case, the States’ actions would be limited to indirectly subsidizing specific sectors of the economy (through, for example, reducing taxes or establishing public-private partnerships) and promoting regulatory frameworks that encourage the inclusion of environmental factors in the risk assessment by the financial agents. Second, there is a reformist form of green finance, according to which the market forces alone are not able to promote the necessary changes for the transition to a low-carbon global economy. Hence the need for a more active role of the State towards this goal, which may draw, for example, on taxation or regulatory actions aimed at sustainable development. Third, the authors present a progressive approach, which proposes a more profound socio-ecological transformation based on the contestation of the capacity of the capitalist market economy to tackle the climate crisis.

Given the international predominance of neoliberal forms of green finance in dealing with the environmental crisis, as well as their ineffectiveness in achieving the goals outlined by the Paris Agreement and the sustainable development goals, studies have been pointing to the urgency of adopting reformist or progressive measures. (e.g., Mazzucato & Collington, 2023; Saad-Filho & Feil, 2023). These, however, would mean confronting the ideological foundation of the IFO of financial globalization. At the same time, the UN (2022), in its ‘Financing for Sustainable Development Report’, highlights the relevance of the sovereign ratings to deal with the environmental crisis, calling for incorporating climate risk factors in the ratings issued by the CRAs. In addition, it considers that ‘a country’s efforts to invest in the SDGs, including in resilience and climate adaptation, should be viewed favorably in ratings that take a sufficiently long-term perspective’ (UN, 2022, p. 23). Against this background, we shall turn to how the CRAs have behaved.

Concerning sovereign ratings, the CRAs have made their methodologies more transparent about how climatic elements affect sovereign creditworthiness. Moody’s (2022), for example, released an update of its methodology in which it explains in more detail how Environmental, Social, and Governance (ESG) considerations influence the rating process. Likewise, the Fitch methodology (2022) presents an appendix explaining the physical, transition, and adaptation risks arising from the exposure of national economies to climate change. ESG considerations have also been listed by S&P (2017) in its methodology. In all cases, the approach turns to how extreme weather and climate events, the loss of relevance of specific economic sectors, or the imperatives of transition and adaptation to a low-carbon economy can impact the States’ financial capacity. Given this, scholarship has observed how the incorporation of climate risks into the sovereign rating formulation has been deficient⁵ (e.g., Klusak et al., 2021), while being limited to the use of ESG ratings for this purpose can lead to erroneous conclusions about green investments⁶ (Fichtner, Jaspert & Petry, 2023).

In addition to ESG considerations in their rating process, the CRAs have become prominent in the green bonds’ certification sector, seeking to fill one of the market gaps in the green finance business (Ehlers & Packer, 2017). Faced with the nuances and difficulties in recognizing a bond as green, especially when it comes to the reversal of investments in environmentally sustainable projects, S&P (2019) and Moody’s (2016) launched specific methodologies for this purpose⁷. Thereby, the environmental crisis has offered the CRAs a new market opportunity beyond their traditional rating business.

In other words, the CRAs appear as relevant actors in the green finance movement, but only by promoting them in a neoliberal form. More than that, as seen in the previous section, the creditworthiness imperatives that guide the formulation of the sovereign rating hinder any possibility of States’ actions aligned with reformist or progressive forms of green finance. This reflects a strategy of tackling the environmental crisis limited to the ideological parameters of the GFO of financial globalization. Hence, if the environmental crisis indicates a potential disruption of this order, this is not reflected in the actions of the CRAs, which represents a delaying force to this process.

5. CONCLUSION: TOWARDS A NEW DISRUPTION?

Once we have examined the behavior of the CRAs throughout the IFOs that have run through the history of capitalism and how S&P, Moody’s, and Fitch have reacted to the possible disruptive crisis of the order of financial globalization, we can reach some conclusions about the configuration of a new global financial order. On the one hand, we saw that the CRAs’ modus operandi historically mirrors the ideological and institutional parameters that underlie the GFO in force, functioning as a proxy of international trends. On the other hand, we saw that the possible crisis of the global order of financial globalization is not yet reflected in the agencies’ actions - at least not for the time being.

This argument developed in two stages. Sections 2 and 3 observed how the performance of the CRAs, mainly focusing on the role played by the sovereign rating in their business, reflected the institutional architecture of the orders of the gold standard, Bretton Woods, and financial globalization. In sequence, section 4 analyzed the behavior of S&P, Moody’s, and Fitch in the face of events that the scholarship understands as potentially disruptive to the order of financial globalization. The first was the 2008 global financial crisis, whose repercussions, contrary to expectations, did not promote significant changes in the CRAs’ operations, despite the new regulations on their actions. The second was the Covid-19 pandemic crisis, which the Big Three treated as ‘business-as-usual’. The third is the climate crisis and its consequences, in the face of which the CRAs have acted following a neoliberal approach to green finance, and therefore aligned with the ideological foundation of the order of financial globalization.

However, this does not allow us to conclude that an GFO transition is not underway for three reasons. First, the financial dimension is only one of the components of the international order, although highly consequential and entangled with the other dimensions. This means that further research is needed to understand the timing/pace at which transitions between global orders manifest themselves in the global financial infrastructure. In other words, it is possible that such a process is ongoing but still needs to be absorbed by the CRAs.

Second, one should assume that, as profit-seeking private companies, S&P, Moody’s, and Fitch tend to adapt to the GFO’s institutional and ideological circumstances after these are consolidated at some level. It is true that, given the relevance they have acquired over their centenary history, these CRAs are now widely recognized as responsible for global economic and financial governance, having a role to play in the dissemination of norms, practices, and institutions that organize this dimension of the international order. Still, given their private nature, they cannot be expected to take the lead in the process. Added to this is the fact that, despite the three potentially disruptive crises for the order of financial globalization, there are still no new ideological or institutional parameters that may come to replace those hitherto in force, with any movement in this direction still being restricted to expectations.

Third, there have been experiences of contestation of the financial globalization GFO that have taken place in its financial infrastructure, which reinforces the thesis that there are movements to challenge it - albeit without any disruptive potential, at least so far. A relevant example is the experience of Dagong Global Credit Rating, a Chinese CRA founded in 1994 under the inspiration of the Big Three. In 2010, during the global financial crisis aftermath, Dagong entered the sovereign rating business, causing a series of controversies. On the one hand, due to the sovereign rating assigned to the United States, which was lower than those issued by S&P, Moody’s, and Fitch, being further downgraded in 2011 and 2018 (Reuters, 2018). On the other hand, due to the ratings assigned to China’s geopolitical allies, especially the Brics, which were better than those issued by the American agencies. This triggered accusations of ‘capital terrorism’, with the Chinese CRA being attacked for impairing the financial capacity of the United States (Ferris & Sant, 2012). Dagong’s experience, however, came to an end in 2019 when it had its activities suspended by Chinese regulators (Bush, 2021).

Also, the group composed of Brazil, Russia, India, China and South Africa considered creating a Brics’ CRA. However, this articulation was not taken forward, and, as Helleiner and Wang (2018) analyzed, it is unlikely that a Brics’ CRA could be able to challenge the hegemony of the Big Three. On another front, in the second decade of the 21st century, Dagong, in partnership with the Russian CRA, RusRatings, and the American Egan-Jones Ratings, launched the Universal Credit Rating Group (UCRG) initiative. To minimize the possible geopolitical bias of the ratings, the purpose of the UCRG was to offer ‘neutral’ and independent ratings without competing with the established CRAs. For Helleiner and Wang (2018), such an initiative could indeed have created a new niche in the GFO’s financial infrastructure. However, nearly a decade after the inaugural UCRG manifesto, Dagong’s suspension appears to have stalled the UCRG. In any case, despite the failure of these initiatives to challenge the current GFO financial infrastructure, the fact that they exist and are proliferating indicates, at the very least, that a disruption process cannot be ruled out in the future. Furthermore, these initiatives indicate that developing countries are aware that reducing the asymmetries that mark their integration into the financial globalization GFO requires the development of new institutions that operate within the global financial infrastructure.

With these caveats in mind, we can now return to the conclusion that the modus operandi of S&P, Moody’s, and Fitch in the wake of potentially disruptive events for the order of financial globalization does not support the scholarship’s diagnosis of an international order transition. This is a particularly critical finding in light of the role played by CRAs in the order allegedly in crisis. As seen in section 2, in the financial globalization GFO, S&P, Moody’s, and Fitch have a political role in promoting governments ideologically committed to the GFO, which adopt the economic policies and institutional frameworks necessary for its operation. To do so, they have at their disposal a powerful tool to influence the fate of national economies: the sovereign rating. It follows that since international politics and the decisions that guide the course of the global order are made, to a large extent, by elected politicians in the (advanced economy) countries integrated into financial globalization, the CRAs become potential obstacles to the dismantling of this order, serving the purpose of delaying this process or, ultimately, making it unfeasible.

This research, therefore, contributes to studies on stages of capitalism by promoting its dialogue with what the IPE scholarship has understood to be the role of the CRAs in the order of financial globalization. In this way, not only does one better understand the various stages of global capitalism by observing how these centuries-old actors have reinvented themselves throughout history, but one can also extract lessons about current tendencies of the global order. On the other hand, from the historical perspective adopted in this work, the weakening of the CRAs in global financial governance or a reorientation of their activities in the medium term, in line with the historical process of more than a century that runs through their existence, also becomes more credible.

Meanwhile, projections like these open other promising paths for academic research. In particular, the role played by CRAs in green finance, given the current environmental challenges, seems especially critical to the fate of their relevance as players in global financial governance. This is because it has become clear that neoliberal forms of green finance are insufficient to effectively contribute to achieving the Paris Agreement’s objectives and the UN’s sustainable development goals, so new criticisms and regulations may arise as the climate crisis worsens. Meanwhile, new challengers in the global financial infrastructure may appear to fill the gap in promoting more effective approaches to green finance in the global financial infrastructure if the Big Three do not move in this direction. It will be up to researchers on the subject to know how to identify and shed light on these potential initiatives.

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1
This is the type of rating for bonds issued by national governments, indicating their capacity and willingness to repay debt obligations with private creditors.
2
In addition to these three international regimes, Sato (2012) also considers two other (less tangible) elements in the composition of an international economic order: the pattern of international distribution of wealth and power and the development strategy implicit in the order in question.
3
As exemplified by ESMA (2023).
4
As one can note in Moody’s (2015, 2019, 2023).
5
This is due to the longer-term horizon of the effects of the climate crisis than those considered in rating the sovereign bonds’ creditworthiness.
6
As ESG ratings also consider elements related to governance and social matters, a good ESG rating does not necessarily reflect alignment with the imperatives of the environmental crisis.
7
Moody’s, however, has decided to discontinue this project in 2020, given the prominence of one of its affiliates in the green bond certification market. See BusinessWire (2020).

8
JEL Classification: F50; G24; N20.

Publication Dates

Publication in this collection
20 Dec 2024
Date of issue
2025

History

Received
11 Sept 2023
Accepted
11 Mar 2024

This is an open-access article distributed under the terms of the Creative Commons Attribution License

[1] Barta, Z., & Johston, A. (2017). “Rating Politics? Partisan Discrimination in Credit Ratings in Developed Economies”. Comparative Political Studies, v. 51, n. 5. https://doi.org/10.1177/0010 414017710263
» https://doi.org/10.1177/0010 414017710263

[2] Barta, Z., & Johston, A. (2023). Rating Politics: Sovereign Credit Ratings and Democratic Choice in Prosperous Developed Countries. Oxford University Press.

[3] Benmelech, E., & Tzur-Ilan, N. (2020). The Determinants of Fiscal and Monetary Policies During the Covid-19 Crisis. Available at https://effibenmelch.files.wordpress.com/2020/06/covid19_0624_final.pdf
» https://effibenmelch.files.wordpress.com/2020/06/covid19_0624_final.pdf

[4] Berrou, R., Dessertini, P., Migliorelli, M. (2019). “An Overview of Green Finance”. In M. Migliorelli & P. Dessertini (Eds.), The Rise of Green Finance in Europe: Opportunities and Challenges for Issuers, Investors and Marketplaces. Palgrave Macmillan.

[5] Besedovsky, N. (2018). “Financialization as calculative practice: the rise of structured finance and the cultural and calculative transformation of credit rating agencies”. Socio-Economic Review, v. 16, n. 1, pp. 61-84. https://doi.org/10.1093/ser/mwx043
» https://doi.org/10.1093/ser/mwx043

[6] Binici, M., Hutchison, M., & Miao, E. W. (2018). “Are credit rating agencies discredited? Measuring market price effects from agency sovereign debt announcements”. BIS Working Papers no 704.

[7] Block, S., & Vaaler, P. M. (2004). „The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries”. Journal of International Money and Finance, v. 23, n. 6.

[8] Bush, C. (2021). “The Rise and Fall of Dagong Global Credit Rating Agency: A Geopolitical Challenge for the Rating Industry”. Journal of Finance Regulation, v. 7, pp. 319-324.

[9] BusinessWire (2020). Moody’s Retires Green Bond Assessment Product in Light of Market-Leading Second-Party Opinion Service Available from its Affiliate Vigeo Eiris. Available at: https://www.businesswire.com/news/home/20201022005733/en/Moody%E2%80%99s-Retires-Green-Bond-Assessment-Product-in-Light-of-Market-Leading-Second-Party-Opinion-Service-Available-from-its-Affiliate-Vigeo-Eiris
» https://www.businesswire.com/news/home/20201022005733/en/Moody%E2%80%99s-Retires-Green-Bond-Assessment-Product-in-Light-of-Market-Leading-Second-Party-Opinion-Service-Available-from-its-Affiliate-Vigeo-Eiris

[10] Cash, D. (2019). Regulation and the credit rating agencies: restraining ancillary services. Routledge, 2018.

[11] Cohen, B. J. (2015). Currency Power: Understanding Monetary Rivalry. Princeton University Press.

[12] De Conti, B., Prates, D. M., & Plihon, D. (2014). A hierarquia monetária e suas implicações para as taxas de câmbio e de juros e a política econômica dos países periféricos. Economia e Sociedade, v. 23, n. 2.

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International Financial Order	Ideological Hegemony	Duration	Disruptive crisis
Gold Standard	Laissez-faire/Quantity Theory of Money	1880s to 1920s	Great Depression
Bretton Woods	Keynesianism	1940s to 1971	Crisis of the 1970s
Financial Globalization	Neoliberalism	1980s to 2010s	2008 Global financial crisis, Covid-19 pandemic, Climate crisis
A new order?

International Financial Order	The rating agencies’ business
Gold Standard	Rating agencies are set up in response to market demands; the sovereign ratings business is inaugurated and expands.
Bretton Woods	Rating agencies’ business integrates with financial regulations; the sovereign ratings’ business is almost extinguished by restrictions on international financial flows.
Financial Globalization	Rating agencies become key players in international financial governance; the sovereign ratings business revives and expands in its role as gatekeeper on States’ access to financial resources on sovereign debt markets.