Are US-based credit rating agencies an arm of US foreign policy?

It is no coincidence that Moody’s Investors Service has downgraded Turkey’s sovereign credit rating from Ba1 to Ba2 soon after Turkey launched a military operation in Afrin against the YPG, the Syrian affiliate of the PKK terrorist organisation.

The timing appears to be significant – almost as if the downgrade was a retaliatory measure – because Operation Olive Branch is considered by many to be a direct confrontation with the US as the YPG continues to be trained, armed and supported by them to supposedly ‘fight against Daesh’ – it doesn’t seem to matter that Daesh has been significantly weakened military, and according to some, defeated.

This is not hard to imagine considering credit rating agencies such as Moody’s, whose main purpose is to collect information about a borrower country so that investors can evaluate whether the country will be able to repay its debts, is part of Moody’s Corporation - an entirely US owned corporation. 

Though meant to be an independent credible source, the clearest evidence for organisational partisanship are not just the reasons cited by Moody’s Corporation that led to the downgrade, namely continued loss of institutional strength and increased risks from its wide current account deficit, but also the historical context.

When it comes to continued loss of institutional strength, which means that institutions such as the central bank are under political pressure when it comes to policymaking, one is assuming that the consequences are detrimental to Turkey’s economic success. 

However, that point depends less on objective facts and more on who you  ask and what they consider "value".

President Erdogan called for cheaper credit to encourage entrepreneurship. This meant stable interest rates despite high inflation, which is against the largely neoliberal notion of ‘inflation targeting’ – a central bank policy that focuses only on ensuring a low inflation rate because it assumes the economy is inherently stable and does not need any other regulation. 

It’s quite telling when the two most influential credit rating agencies, including Moody’s and Standard & Poor’s, who have both downgraded Turkey’s sovereign credit rating in the past year, are owned by US corporations – it wouldn’t be off-base to say their economic and business values are colored by neoliberalism. Never mind the fact that the policy has paid off remarkably well and has been cited as one of the reasons behind Turkey’s economic resilience.

Let’s take a look at the increased risks from a current account deficit, meaning that the value of exports or money coming in the country is less than the value of imports or money going out of the country. 

It is true that Turkey is suffering from a wide current account deficit. However, not all current account deficits are equal because what matters is how and when the government plans to finance the difference. 

When the government plans to finance it through foreign investment, yes, it is unsustainable, because dependency on foreign capital is always subject to risk. This is especially more so for Turkey given its geopolitical realities. 

However, when the government bets on consumer spending – which, in the case of Turkey, it arguably should considering it worked – it is not. Consumer spending is high, and expected to grow.

Relying on consumer spending alone to finance the gap between money coming in and money going out of a country does lead to lower economic growth though because it is not export-led, exposing a country to sustained (and thus problematic) current account deficits. This is especially if foreign investment dwindles, which it will if credit rating downgrades persist. 

However, it is a fallacy to assume all export-led growth is good when it is in fact linked with dependence on foreign markets and trade, neglect of domestic priorities and wage suppression. 

Again, Moody’s credit rating is not reflective of Turkish priorities – rather it is reflective of American priorities. 

With general elections in Turkey around the corner, it makes sense for the current Turkish government to ensure at least the near term economic well-being of its voters – and it appears, considering the timing of the downgrade, that the US is not likely to make that any easier. The sovereign credit rating mechanism is being used as an economic weapon.

This is not too farfetched, especially when you look at instances of partisan opportunism peppered throughout recent history. 

According to a study of Moody’s credit ratings for all OECD countries, it appears that there is systematic partisan discrimination in sovereign credit markets, preferring neoliberal policies such as free trade, privatisation and reductions in government spending over the past two decades. 

Downgrades were often used as convenient excuses for applying austerity and privatisation policies that they would not be able to promote otherwise, such as during the Greek debt crisis. 

Credit rating agencies have been under intense scrutiny for being responsible for the 2008 global financial crisis itself through fraud as they offered overly favourable evaluations of insolvent financial institutions and extremely risky mortgage-related securities, with banks’ size and connections being of disproportional influence.

It is telling that the European Union has cut financial firms’ dependency on US credit rating agencies and are instead favoring independent alternatives. Perhaps that's not a bad idea for everyone else as well.