What If Credit Rating Agencies Were Downgraded? Ratings, Sovereign Debt and Financial Market Volatility

The activity of Credit Rating Agencies (CRAs) can lead to Excessive Volatility Risk (EVR), adversely affecting issuances of debt by sovereign governments. By EVR, we mean the risk of effects on bond yields, caused by ratings which are independent from the supply of new information (information discovery effect). EVR may depend on two factors: the fact that ratings are embodied into regulation (rating-based regulation effect); the communication policies adopted by CRAs (communication effect). If EVR is to be reduced, on one side it is necessary to eliminate rating-based regulation, and on the other to introduce forms of liability in the communication policies of CRAs.