The Other Problem with Ratings Agencies

[MUSIC PLAYING] MARK BLYTH: Hello, and welcome to the Rhodes Center Podcast. My name is Mark Blyth, and I'm the director of the Rhodes Center for Economics and Finance at Brown. We're back. We've got a new semester, we've got a new lineup of great speakers. And first out of the gate are two wonderful scholars, Zsofia Barta who is a professor at Suny, and Allison Johnston who is a professor at the University of Oregon. And they're really interested in something we were all interested in 10 years ago, which was credit rating agencies.

So the usual story you're familiar with, there was a bunch of stinky mortgages. Those thinking mortgages got stuck into bonds. The people who owned the bonds wanted to get them rated AAA. So they played the agencies Standard and Poor's Moody's and Fitch against each other, and managed to get a bunch of crap rated as AAA. That led to a mortgage crisis, and in many cases, a decade of lost growth. And then it kind of disappeared off the radar but now they're back.

And we're back in this story, which is called Rating Politics, how sovereign credit ratings reward and penalize political and policy choices and prosperous developed countries. So welcome to the both of you.

ZSOFIA BART: Thank you.

ALISON: Thank you.

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MARK BLYTH: So I'm going to give a little bit of a rundown of what I think your argument is. I'm going to ask you to expand on it, and then we'll just go from there. So here's how I read this, so it's about the business model, but it's not the pay for play moral hazard story that people are familiar with. So rather than inflating ratings to get business in the door, when it comes to sovereign debt, the trick is to ensure that the rating agency in question is insured against unexpected losses.

So what they try and do is build insurance into the bond. And they do that by estimating what you call and they call a state's capacity for fiscal flexibility. That is can they raise taxes and cut spending quick to stabilize the rating, if some kind of exogenous shock basically makes it a downgrade from an E to a B, or however it goes.

Now, why should we care about this? And this is the really cool bit of the book, because big ratings downgrades for a rich, developed, stable, prosperous states in particular, are bad for business. We think a lot of Argentina and Venezuela and things like this. But you say no, the auction's at the top of the food chain, and it's actually much more determinant than we think.

Secondly, because the rating of the state determines the rating and all of the other bonds that anyone can issue in that state. So if the state goes down, Swedish corporates go down, if Sweden goes down, for example. And because-- and this is the really insightful thing, I think-- big ratings failures tend to lead to big portfolio re-allocations. And I want us to talk about that and the impact that this has.

So basically, the raters like stability more than they care about accuracy. So the users may think that these are accurate ratings. But in actual fact, the business model is, no, they're just kind of stable ratings and we like it that way, because it would insure the [INAUDIBLE] shocks.

Now, two consequences follow from this. This is all driven by the bottom line rather than any set of enforcing neoliberal ideas. And it means that austerity emerges at the level of the firms seeking to avoid losses rather than bond market vigilantes or neoliberal economists pushing cuts. So, how well was that for a summary of the argument? What did I miss? So, what would you add to that? Zsofia, let's start with you.

ZSOFIA BART: I think that was a very fair summary, but I would actually just say one more thing about austerity, because you are saying that rating agencies are implicated in triggering austerity rather than market vigilantes do. But what we are also arguing is that they are already building lower ratings into the system. So they are already penalizing countries that they assume are going to be less likely to go into austerity.

So we don't even wait for the actual shock to happen, for all of this to play out. And some countries are already lower rated because they are seen as less likely and less able or less willing to do austerity, worse things happen. And so in that sense, it is a bit even more complicated because these considerations play out even in the absence of a shock. It's literally just an insurance in case a shock happens.

MARK BLYTH: So that's quite startling when you put it that way, because what it suggests is when one of these agencies look at a country, let's take an archetypal social democratic country. And you see high taxes and high spending and all this stuff. They are looking at that. They're looking at it for reasons of how quickly can they save the value of my rating, they're not really looking at the country.

But you're suggesting, in fact, that they're probably already down a couple of not just from where they could be, because it's really about baking in the insurance policy rather than anything else. Alison, would you add anything to our summary so far?

ALISON: Yeah. I mean, I would say you are the definitive source on austerity. And I think what we try to argue is it's not austerity that they're wedded towards, it's the ability to implement austerity quickly. And so what that ultimately means is they're really paying attention to the policies that would impede the ability to implement austerity quickly. Which is not to say that they negatively judge any policies that would potentially require austerity, but governments might theoretically not implement them.

And I think that's what really sets our argument apart from a typical austerity narrative or neoliberal narratives that you have advanced, that the devil's really in the details. And if you're ultimately-- Ultimately, we're putting forth a theory that says rating agencies cover their asses. And this is basically the business model that grains policy penalty is into bond markets. But it's not austerity per se.

There are certain policy items where if they're massive like they are in the Scandinavian countries, they're not too concerned about it because they know when push comes to shove, these Scandinavian countries will be able to implement austerity quickly.

MARK BLYTH: That suggests to me-- putting my thinking about austerity is I do hot on this one-- that you might not really be testing two models in terms of I need to choose between them, that they might go together. So let me break this down a little bit. First of all, isn't prioritizing austerity or the ability to do austerity quickly a very neoliberal idea in and of itself?

And when you go through the statistical analysis in the book, what was really interesting to me is that yeah, absolutely. If you've got lots of taxes, and lots of social spending, particularly pensions or big deficits, unsurprisingly, we've known this for a while, all of that grades down. That again, seems to ride along with a neoliberal reading rather than challenging it.

One of the ones that you point out is an anomaly, and is at corporate tax capacity, right? But that could just be simply because no one collects them, so long as you're real on the ball and you've got a little bit more capacity.

And similarly, one of the ones you highlight is compensation for government employees get you a higher rating. Well, putting my evil neoliberal hat on, that could just be me saying, well, you've got plenty of jobs you can cut. So how do the difference between the two?

ZSOFIA BART: So I think the way we interpreted neoliberalism is like an epistemic ideological commitment to a small state, and that would be motivated by some kind of underlying idea of what makes the economy function well. And the emphasis that we put here is that this has no connection to what our ideas are about what makes the economy functional. What it really boils down to is this one element of policy, which is not letting markets get cold feet in the case of a shock.

So austerity is to prioritize not necessarily because these actors think about this as the right policy to follow, but it's simply because market panics create the biggest chance for default. And so in that sense, we don't define this as neoliberal. It has the same effects but it's not neoliberal approach, in the sense that this is not about how the economy works, it's about whether a country can retain the confidence of the markets in the case of a particular shop.

And in that sense, what we find is there is this pattern of certain elements of the budget that are being rewarded as you mentioned, for example, the compensation of employees. And that's exactly the point that if you have more faith in the system, that you can actually call in the case of an economic shock that increases your rating rather than in the case of a neoliberal approach. This would be something that slows the economy down whereas for rating agencies, this is some kind of buffer that you can use in the event that something goes wrong.

ALISON: And I would also kind of add to that, particularly in the results for corporate taxation and for public sector employees. This is also kind of a proxy for state capacity, that the state has the capacity to command tax revenues from a public that is willing to be taxed. And the compensation of public employees being associated with stronger ratings is largely driven by the fact that the Scandinavian countries can tax their populations by 50 or over 50%, and that really reflects a strong fiscal compact.

So the fact that is rewarded, so to speak, is indicative of the fact that credit rating agencies do like strong state capacity. They do like states that have the ability to command higher tax revenues from corporate actors, as well as from the public at large.

MARK BLYTH: But let me throw in a counterfactual on this one, of it's essentially the idea is a functional fit and it saves the model, rather than it goes with some kind of ideological profile. Imagine a world in which countries hit with a shock, the bond rating starts to teeter, the market actors start to dump the assets, they know they're going to have a downgrade they're going to have to deal with. And the government question comes along and says, all right, here's what we're going to do, we're going to Institute a wealth tax. And we're going to do it on very top earners of 50%.

Would that be a good thing? Would the raters go, yep, great. Because I mean, if you could find something like that, would really be proof that it's not any type of neoliberal idea behind it it's simply a functional fit. Would you think that was what you would see if that happened in such a counterfactual world?

ZSOFIA BART: I can't think of a concrete example of this happening, but my answer is absolutely yes. So for rating agencies, this would be a helping hand from the government, it would actually save their backs in the case of a situation which could very quickly spiral out of control with downgrades leading to market panics and market panics leading to downgrades. So I would say that if government showed this able and willing to do that, that would actually be a positive for its long term ratings.

And I think in our case, that is, we repeatedly see issues where rating agencies actually caution governments against any attempts to cut taxes. So in that sense, we find a little bit of evidence that they actually are for higher taxes. And when they put lower ratings on long term high taxes, that's because they're afraid of tax revenues being already fully exhausted even before shocks come onto the horizon.

ALISON: You know, it'll be interesting to see how credit rating agencies assess Joe Biden's plans to tax wealth. And I imagine that as a brand new virgin taxation source, this is something that they won't view negatively. They might be indifferent or they might be positive, but I don't anticipate it something that Biden would get criticized for.

MARK BLYTH: So that's really fascinating, because it really cuts against the dominant narrative that we'd have about these types of agencies, and sets them apart from the IMF and other organizations that people write about in this regard. One of the great things you do is you get into the black box of how ratings are done.

So what they do, if I got it right is the following. I have no idea what's going to happen over a 10 year period, and I'm not going to basically take long term neoliberal principles as a guide because God knows where I'll end up. So the thing that struck me is the following. If you basically don't know what the future is going to be, a very simple thing to do is a wait time series of the past.

ZSOFIA BART: Yes.

MARK BLYTH: Right? And you just extrapolate it forward.

ZSOFIA BART: Yes.

MARK BLYTH: But the only time that you would ever really need to know what's going on is when that time series absolutely fails, when you're in a moment of crisis, right? The situation is no longer stationary. So at that point in time if you're just trained following, aren't these guys going to get it more wrong by doing that?

ZSOFIA BART: So the argument is that this is exactly the time when you need an insurance, right? And so you are trying to just go with the trends, plus you put in extra insurance for when things go wrong. And basically, you only have to insure yourself against negative shocks, not against positive shocks. Because what the investors care about when it comes to credit or when it comes to bonds is just the downside risks, right?

So that's exactly the point in our book is that because we can get by with the extra operating in normal times, we have an extra insurance for non-normal times when things can go into all sorts of directions and we have an insurance against the downside. And if some crazy good things happen on the upside, all the better. We are going to gradually upgrade this country, and then we are safe in either direction.

ALISON: Although I would add to that, one thing that we really bring out in our case studies is how credit rating agencies use structural reform as a proxy, a prediction about how governments might react when that shock comes. Essentially, structural reform is a means of predicting an end. And so governments and politicians and heads of state or heads of government are willing to engage in that structural reform.

This is why not just like George Osborne's treasury and Cameron, the Lib Dem conservative coalition got such high marks. But also Matteo Renzi got a lot of high marks, Matteo Renzi was talking about introducing a wealth of structural reforms. And so generally when you get governments like that, that are really kind of backing behind structural reforms, in the case of Renzi, not at a time of acute crisis.

Credit rating agencies routinely respond to describing these types of governments as credible or they're willing to see this through. So it is kind of a proxy to gauge what things will look like when that trend goes off, Mark.

MARK BLYTH: So that's fascinating, because I mean, this gets under the kind of performative aspect of this rather than the real thing. Because if we think of the structural reforms, if we think about the Osborne period as a period social reforms, yes, they said all the right things and then British productivity completely collapsed. And if we think of it Italy, Renzi talked a good game, and Monte talked a good game before him, Draghi is currently talking a good game. Why are people being rewarded for words? Because it that is not really all this is, if the words work that saves the bond rating and therefore benefits the firm?

ZSOFIA BART: I think part of this is actually just the confidence fairy argument that people were making, that we don't actually have to see the outcomes, we just have to calm markets. So, I guess part of this is if rating agencies see a government that's credibly committed to imposing fiscal pain, then that's enough for their purposes because it's really market panics that create the biggest risk for rating failure. And so in that sense, yes, it is a confidence game and therefore words matter.

ALISON: And I would say on top of that. Again, it's not just words matter, but if you partially commit to what you're saying, I think you get quite high rewards for that. So again, I think that the example of Matteo Renzi, he was really praised for his jobs act, right? I mean, this is something-- Italy needs reform of its kind of fixed contract system.

s the case was because of the: 2016

And so again, using that as a proxy that, Oh, when things get tough, if he's doing this little bit of work in a period of relative calm, we have confidence that potentially he could go further if the time's required it.

ZSOFIA BART: Basically, this is a test of whether a leader or a government is able and willing to take on vested interests. So if they demonstrate that kind of willingness and ability, then it counts for them because when the time comes to do that again after a major shock, they are more likely to be able to show that kind of performance again.

ALISON: And I think this is also can be seen quite nicely with how rating agencies talk about Theresa May and Boris Johnson's government. How these two governments they said, OK, we care about austerity we care about our fiscal balance, but we're going to make a huge commitment to the NHS.

And this is where rating agencies said, OK, in the midst of fragmentation and minority governments and saying you're going to increase spending on the NHS, you're not committed to austerity. You're not able to cut the deficit.

MARK BLYTH: But that would-- I hate to bang on about it, but it brings me back to the how do we differentiate that from neoliberalism? Because ultimately, what they seem to care about is not spending money, keeping deficits down, et cetera, all of which seems very neoliberal.

But you do have a very different argument-- which I really enjoyed and really like-- about portfolio allocation, which I'm going to sum up in the following way. Sweden mars much more than Argentina to global bond markets, which is wonderfully counter-intuitive. Would one of you like to walk the listener through how this whole thing about portfolio allocation mars for these rich country bonds?

ZSOFIA BART: So this brings us to the question of why rating agencies are so influential. And very often, they are thought to be influential because there's a thought to orient the decision of investors. But in actual reality, the way that the rating agencies are used or rating-- sorry, sovereign ratings are used, is that they help regulated relationships between institutional investors and their clients, and they have to get clients to set the risk taking limits on the portfolio that is being purchased in their names.

And so for those portfolios, especially the ones that are used by-- the clients that at least able to monitor what's going on in terms of pension funds and so on, those actually usually required the highest the ratings. And so those ratings have to be very, very, very reliable to shocks. And so, if a credit rating figures at the highest level of the rating scare, that's a real disaster for rating agencies because it undermines their authority across the entire ratings scare.

And because so much of the institutionally invested funds is actually invested in those ranges, from the AA range, AAA to maybe AA- is the lowest ratings that many of these pension funds and other institutional investors can even invest in. If those ratings fail, then that really being a meltdown into the entire market, in the sense that if there is a downgrade, those portfolios automatically have to be reallocated because the ratings are baked into the institutional rules.

So as soon as those ratings are downgraded, then there is a mass sell off in those rating ranges and that actually creates pressure for further downgrades, and then an automatic and self reinforcing spiral starts. And this is important for us sovereign bonds, but it also is important for all the other bonds in that given country. Because as you were also mentioning, the government is the best borrower in a given country.

So if the government's bonds are downgraded, then that kind of cascades through the entire portfolio, so the entire structure of different instruments, not just corporates but also banking and so on. And so the top ratings are really the most important ratings to not get wrong and to have complete insurance against these kinds of events.

ALISON: And I would add to that too. If you're an investor, you have a portfolio, some of that portfolio, you have a high appetite to risk because you want to see if you can really maximize your return. But some of that portfolio is your kind of safety net, it's the part of the portfolio where you want it to be stable.

And so if you're an investor, you go and buy Argentinean bonds because you're making a bet on risk and you're trying to see, OK, is this a high return that I could get back? But the Swedish bonds are your nest egg, they're your safety net. And if those bonds fail, if those bonds then become risky, you're really in trouble.

MARK BLYTH: And that's really fastening because I was thinking about this from an investor's point of view. What does it mean to have a safe asset? Because ultimately, what you guys seem to be saying is Sweden's probably AAA, but they're going to make it double AA just because the pricing and the chance that it might drop a few. If it drops a few from the already downgraded state then it could really move fast, and that could have a massive consequence. So it's not safe in the way that we would think about it.

But in another way, if I want to buy some Argentinean debt. I mean, come on coming up for the 10th default, they're basically owned by the IMF. I know that I'm shocking good money off that bud, but the yield over a period to default could be really high. So why no? This creates some kind of perverse incentive for investors, doesn't it?

ALISON: Yeah. But I think it also highlights the importance of really properly assessing risk for non risky assets. And I think that was the whole reason why the European debt crisis took markets so off guard, as they assumed all these European sovereigns were rated at the high end of the rating scale. They are safe risks, and then all of a sudden they're not because ratings got things completely wrong and this is why you get this panic.

And so I think our argument really rests upon-- there's huge pressures on rating agencies to rate those safe comparatively stable assets, and to get those right. Because when they don't get those right, that's when things really fall apart.

ZSOFIA BART: I wanted to also just jump on this because when you talk about the investor making this decision between the Argentinean and the Swedish bond, what is important to understand is that most investors don't and especially the institutional investors, which account for a large part of the entire market, they are not even able to go into those areas.

And so in a sense, Yes Argentina is a safer bet in the sense that yes, is going to oscillate and go up and down, but you know what you are getting into. And the problem with rating failures at the top end of the scare is that because most of the funds in these institutional investment it is directed towards these highly rated assets. If those funds have to move out of those assets, then suddenly these countries become, so-called, fallen angels because they are relegated into a place where there is not much less funds to go around them, right?

And so in that sense, your intuition is completely right, that probably just from the perspective of market meltdowns, Argentina is a safer asset, but most institutional investors won't be able to take advantage of that kind of logic.

MARK BLYTH: So yeah. So this is fascinating. All of the risk is being crammed into the safe asset, but it's not really seen as risk.

ALISON: Yeah.

MARK BLYTH: Right? That's really insightful. I mean, I've never heard of that before. It's a really great insight. I want to go for something trivial but nonetheless I think very interesting. Well, perhaps it's not trivial. If you had to line up socialists, social Democrats, Christian Democrats, and right wing neoliberals in a line and say which one's going to get the worst score from rating agencies? I wouldn't have bet it was Christian Democrats and centrists, but it turns out it is. Why is that?

ALISON: Yeah. Well, I think with Christian Democrats, we automatically assume it's not ever going to be downgraded. But you also have the main center right parties in Spain and Portugal and Ireland are also Christian Democratic parties. And these are parties that are cross class parties and that have to keep a lot of people happy. And when you have a cross class coalition, it becomes really difficult to paint a part of society because of all society falls into your net.

And this was the problem with Italy, right? Italy had a Christian Democratic government that basically dissolved and was wiped off the face of the planet in '94. But you may have the same issue, that when you're catering to some segments of society with higher spending and other segments of society with lower taxes, it really becomes difficult to keep those cross class coalitions together, if you have to make painful changes about who and society is going to have to suffer to rectify a negative shock.

MARK BLYTH: Similarly, Denmark gets a better score than the UK, the home of at least the Europeans neoliberalism, what's that all about?

ALISON: So with Denmark, I mean, again, it's this notion of going back to a Peter Katz in the style and kind of conceptualization of small states and in World markets. Small states are effective in World markets because they work together, and they're able to weather crisis because consensus is something that can be achieved quite readily.

And this is something that credit rating agencies also really appear to value. When elections happen in Denmark for the most part they don't care because they know that the right and the left, the social Democrats and vents are going to work together.

But in the UK, when you have a two party system where you have a majority party that can call all the shots, it doesn't matter if politics is divisive and polarizing. As long as one party can make all the decisions, that's fine.

But then when you have an instance where that party no longer commands a majority of parliament, they rely on other parties to work together. And they come from a tradition where they never work together, they're very acrimonious to other parties. That's when things really hit the fan and where it becomes questionable as to whether these parties will be able to achieve something where they require a kind of a broader coalition of support.

ut something that happened in: 2011

ALISON: Nope.

ZSOFIA BART: No. They still have the same rating.

MARK BLYTH: Right. If the argument is it's about the quality of government and competence in government or whatever, you'd think they would have picked up on that one. So from the point of view of your model, why wasn't Trump a threat?

ALISON: I mean, he did have the House in the Senate for a brief period of time. And also, I think-- so the downgrade, the S&P downgrade of the United States, this is really when the huge standoff over the debt ceiling was happening. And when there was concern that the Republican Party could potentially hold a gun to the United States government's head and say, we're not going to play along with something that we typically play along with.

Now admittedly in the: 2018

And so I would say with Trump, it's probably a combination of the fact that his opposition party was a little bit more cognizant of the consequences of not raising the debt ceiling, coupled with the fact that he also had the Senate and also the House, at least within his first two years of office.

to: 2016

But I'm wondering about after: 2017

Italy and Greece are permanent wards of the ECB, in the sense that so long as they in recession, they'll keep buying their bonds. So there were never accurately modeling less risk, that's your point, they are basically protecting their business model of ratings. But does not complicate your story in any way? The fact that we now have negative rates, a surfeit of debt, and institutions which basically guarantee losses.

study chapter where we go to: 2020

And you see this very emphatically with Italy, right? I mean, Italy does have the ECB basically providing it with a safety net when times get tough. But also when the populist five star labor government came in, their rates did rise around the time when they announced their budget. And this was something that credit rating agencies also were very concerned about downgrade Italy over as well.

And so I would say, even in these kind of eras of really low interest rates where we don't think interest rates are going to budge, you still have these unpredictable political events that still can move yields even in these periods of strong deflation. And credit rating agencies really respond to that because again, it's something that makes the future much more difficult to predict.

ZSOFIA BART: We're not saying that what they do is going to be equally consequential under any kind of policy regime. But during this policy regime, it's probably less consequential. But at the same time, it also shows what kind of considerations, for example, the ECB or the Fed has to take into account when they change that policy regime, because now they are suppressing many of those consequences that's going on in the rating world.

And with respect to that, I actually wanted to also reflect on what you said about the ECB backstopping countries like Italy. So what's really interesting about this is because of these interdependencies, what we are not seeing right now is how that's going to change the relative ratings not just of Italy, but also of the countries and the institutions that guarantee Italian ratings.

So, it's true that Italian ratings are going to be-- there is going to be a floor under that because if they have a guarantee, de facto guarantee, then they are going to be propped up by the guarantors rating and the credibility of the guarantee itself. But at the same time, it's also going to affect the ratings of the ECB itself, that they have such a huge guarantee outstanding.

And that just that-- even if the ECB was to change the guarantee, then it has implications for everybody in the eurozone because if Italy was to crash out of the eurozone because the policy changed, that would have unbelievable ripple through effects on Germany and frugal four, and everybody else.

So what I think is the case in this day and age is, yes, we are not seeing such big changes, but those considerations are actually going on in ratings. And I think as soon as the policy changes, as soon as this overarching monetary glut dries up, we can't really predict how rating agencies are going to price in those interdependence season and those weird cross financing relationships. So that's going to be really interesting to see.

MARK BLYTH: No, absolutely. I mean, again, to think of Italy, we think of the corporate sector, if it is the case you have all these zombie companies on life support. If rates ever rise, they are going to go bang before the banks do. Then it's the banks, and then it's the Solvern, and in a sense that's too big to fill. So we still have those same types of dynamics playing out. And the rating agencies in a sense, are going to be buffeted or owned by these forces as much as anyone else's.

ZSOFIA BART: Yeah, and that's just inside one country. And because those countries are all dancing together, it's really unpredictable where those ripple through effects might go.

MARK BLYTH: So let's close with this, one of the things that you want to highlight is the ratings reports, and ratings is always politics. And let's go back to Alison's example of five star come to power. They say we haven't grown in 20 years, we have some ideas as to why. Some of them are good, some of them are wrong, some of them are bad.

But our solution is we basically need to have a universal basic income type thing to shield most of the population because it's just unattainable where we are, and everyone's getting poorer and basically this is crap Now, people voted for that, and that seems to be a reasonable thing to vote for. They're not voting for imperialism or world domination. But essentially, what you're telling us is there's a bunch of unelected American corporates running around, going, you can't have nice things.

Now, I'm not going to use the neoliberal word again, I'm not going to go there. But I'm going to say this does sound like you're providing the microfoundations for Wolfgang Streeck. The marked VALK, THE market people who run things really do run things. Would you jump in to that self definition, would you accept the use you're the microfoundations of Steeck's argument?

ALISON: Well, you think one half of that argument is that do governments listen, right? And that was kind of the interesting thing about five star and the [INAUDIBLE]. I mean, they did eventually kind of change course due to pressures not just from market actors but also from the EU as well.

But yeah. I mean, basically one of our main findings is that credit rating agencies do have a certain preference for governments. But it's not necessarily a right wing government, it's a government that can work together, that has minimal checks on its power, and that essentially can govern effectively.

MARK BLYTH: But can I shorten that? Isn't that really what they care about as a government that insures assets for the investor class?

ALISON: Yes.

MARK BLYTH: That's really it?

ALISON: Yes.

MARK BLYTH: Regardless of where they reside.

ALISON: Exactly.

MARK BLYTH: So there's an inherent tension here, between democracy is a local form and policies you vote for, and what's in the interests if you fuel the transnational investor clause.

ALISON: Yeah.

ZSOFIA BART: Absolutely. I mean, we try to engage with that literature on the golden straitjacket. And they we do find, yes, I mean, the metaphor that we like to use is that the rating agencies are the strings that tighten the golden straitjacket, because they are the ones who are putting-- not only putting penalties on these things, but the other ones who speak with one voice, right?

And so they issue these reports and say, you can't do this or you face downgrades. And so therefore, they are the ones who are issuing the warnings, but they're also the ones who are pulling the trigger on this issue. So yes, we would agree with the fact that there are significant constraints on what governments can and cannot do.

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MARK BLYTH: Well, we're out of time, but it's been a great conversation. It's a wonderful book, I can't wait to see it when it's out. I think it's the smartest thing I've seen in credit rating agencies to date, and it was a delight to talk to you about it. Thank you very much.

ALISON: Thank you.

ZSOFIA BART: Thank you very much.

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MARK BLYTH: This episode was produced by Dan Richards. You can listen to all our episodes anytime, anywhere by subscribing to the Rhode Center Podcast wherever you listen to podcasts. We'll be back soon with another episode of the Rhodes Center Podcast. Thanks for listening.

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