The Struggle to Perform the Political Economy of Creditworthiness

Abstract

Analysing the European Union's regulatory response in the wake of the credit and sovereign debt crises, this paper argues how its adoption of risk management as the core strategy for governing the credit ratings space may undermine European efforts to rebalance the growing asymmetry between private expertise and public democracy. While centralised oversight, enhanced transparency and restorative, technical intervention seem like sound regulatory initiatives, I problematise the methodologies, models and assumptions of sovereign ratings to show how the new ratings framework may actually impede the ability of the technocratic European Securities and Markets Authority (ESMA) to redress the most egregious deficiencies of ratings. Drawing on the performativity of market relations, the paper argues how ESMA's supervisory conflicts undermine the EU's capacity to perform an alternative political economy of limits. Neither is it democratically sanctioned to interfere in the analytical substance of ratings nor should it distort the social facticity of creditworthiness by relying primarily on quantitative risk analysis, ESMA will be forced to either repoliticise the ratings process or promote the status quo, which diminishes fiscal sovereignty.

Why performativity limits credit rating reform

“…Where to draw the line is controversial. Given the impossibility of assessing whether methodologies are 'correct' (Paudyn, 2015), ESMA settles for checking whether CRAs consistently apply their methodologies and modify them in case of unexpectedly poor performance. This latter aspect of 'methodology validation' is controversial.…”

Financially engineering a “self-generative” political economy of creditworthiness: Expertocratic exemption problems for sustainable debt and democracy

“…Expanded to nonequity issuers, LGD assumptions help invertible DSAs derive FVS-CDSs from (selective) EDFs. Model-implied and risk-neutral, default probabilistic conditionality grants sovereign ratings precision optics more available with greater corporate failures (Paudyn, 2015). Objectivity effects reinforce PEC/CRA performance.…”

“…Unfortunately, econophysics disguises subjective TAC judgment diminishing advantage over ergodic TTC platforms. Although permitting CRA, market, and regulatory DSA divergence, TAC risk/uncertainty displacement or synthesis, as verifiable tangibles, preoccupies enough to preclude vast variation (Paudyn, 2015). Notwithstanding (GFC-exposed) model-centric ratings defects, without sustained pressure from either corporate clients or regulators (ESMA/SEC), business remains as usual.…”

“…My better understanding of this black box paradox shows how the OECD's democratic legitimacy crisis inciting populism is also self-inflicted: a negative externality of (quant) risk measurement overdependence to enhance transparency and preempt/ correct capitalist excess (Dorn, 2012). Eager to rectify, but avoid political interference in ratings analytics, ESMA/SEC seeks scientific objectivity and overemphasizes risk validation (Paudyn, 2015). Inadvertently complicit in depoliticizing the 'politics of limits', regulatory passivity suggests superficial CRA contestation.…”

“…Compounding corporate "myopia," regulators like the European Securities and Markets Authority (ESMA) or US Securities and Exchange Commission (SEC) require/sanction technoscientific (sovereign) DSA risk validation (Paudyn, 2015). Inherent (reflexive) DSA/financial self-referentiality aggravates PEC intractable valuations, limiting effective governance (Preda, 2009).…”