Credit Ratings, Information Transparency, and Political Survival

• In Event: Sovereign Debt Dynamics: Regime Survival, Accountability, and Negotiations

Abstract

Retrospective voting models suggest that citizens sanction politicians for economic mismanagement. Citizens often are inadequately informed as to whether incompetence or exogenous conditions explain economic distress. A potential source of information about a leader’s competence is sovereign credit ratings; these offer not only an indication of default risk, but also of broader economic competence. We argue that citizens use changes in credit ratings as a signal of a leader’s competence; they will punish elected officials when ratings decline and reward them when ratings improve. Moreover, citizens’ reliance on ratings agencies’ signals is likely to be heightened in poor information environments. That is, citizens are likely to respond more to ratings signals when there is otherwise less transparency of economic data, and when political control over major economic levers (such as the exchange rate) is unclear. Drawing on quarterly cross-national data of executive approval for over 70 countries from the past 25 years, we identify a robust decline in popular support for elected officials following credit ratings downgrades, even after accounting for the direct effect of determinants of downgrades. In addition, we find that this decrease in popular support is concentrated among states with low transparency, and without fixed exchange rates, helping to clarify that these public signals are of greatest popular value when other information about government economic activity is lacking.

Authors

• B. Peter Rosendorff, New York University

• Cameron Ballard-Rosa, University of North Carolina, Chapel Hill

• Layna Mosley, Princeton University

• Hannah Loeffler, Technical University Munich