The authors of the common language of credit risk

A credit rating agency rates the creditworthiness of a bond issuer. But what does this actually mean? Common knowledge in the context of financial markets suggests that rating involves an assessment of creditworthiness, which relies on figures and data conventionally deemed relevant for this purpose. Generally speaking, the verb “to rate” signifies the assignment of “a standard or value to (something) according to a particular scale”. In the case of credit rating, the object of the assessment refers to any entity seeking access to capital markets by issuing bonds to satisfy its funding needs, ranging from companies, banks, municipalities and sovereigns to supranationals. In the case of public entities, the refinancing through capital markets is not as apolitical as it sounds. When a state or municipality resorts to capital markets, it exposes itself to the CRAs’ judgement, becoming subject to the logics and interpretive frameworks of the financial market community. Unlike politically unpopular taxation, a public entity implicitly consents to the rules of the game of the financial market's sphere. Apart from creating a financial dependence, the borrower tacitly accepts that norms, worldviews and ideas preponderant in financial markets transcend and diffuse into the political sphere.

Considering the definition of the verb “to rate” – assigning a standard or value to a particular scale – the specificity of the credit rating scale is that it is created by the CRAs themselves. The same applies to the assigned value – that is, the rating content; scale and value do not exist independently from each other. The scale constitutes the rating content, mirroring how creditworthiness has come to mean “credit rating”. Instead of amounting to a quasi- metric that is fungible and transferable to other units of measurement, credit ratings have gained power of definition over creditworthiness: A bond issuer is deemed creditworthy because of the top rating, rather than the top rating reflecting a preconceived notion of creditworthiness, which can be transferred to another metric or unit of account. Credit ratings create predictability by themselves.