Breaking the Liberal Paradigm: The Coercive Power of Credit

Abstract This paper examines changes in capitalism’s dynamic structure that have brought international investors increasingly to rely on just three U.S.-based credit rating agencies for their assessments of the risk raised from a wide range of entities, including sovereign states, corporations, and the securities and securitisations they issue. Recent research from multiple disciplines shows how a dramatic increase in investor demand for ratings since the early 1980s, combined with internal constraints on governments and corporations to secure low interest rates, has inadvertently bestowed rating agencies with the power to circumscribe both the policy decisions of elected representatives and the strategic decisions of corporate leaders. Analyses of the criteria on which rating agencies base their assessments of the likelihood of future default expose the divergence between investor interests and two core components of liberal orthodoxy: democratic sovereignty and free market competition.