To err is human: US rating agencies and the interwar foreign government debt crisis

• Published in: European review of economic history 2011-12, Vol.15 (3), p.495-538
• Main Authors: FLANDREAU, MARC, GAILLARD, NORBERT, PACKER, FRANK
• Format: Article
• Language: English
• Subjects: Bond issues; Bond portfolios; Corporate bonds; Credit ratings; Debt; Deficit financing; Economic history; Economic theory; Financial securities; Foreign governments; Government bonds; Inflation; Interwar period; Investments; Investors; Loan defaults; Rating services; Ratings & rankings; Regulation of financial institutions; Securities markets; Sovereign debt; Stock exchanges; Studies
• ISSN: 1361-4916; 1474-0044
• DOI: 10.1017/S1361491611000153

This article provides a new perspective on the interwar foreign debt crisis by analysing original data on the credit ratings, market yields and subsequent performance of government borrowers in the New York market. We focus on the four agencies that are known to have been operating at the time (Fitch, Moody's, Poor's and Standard Statistics). We provide a description of the rise of the market for grades and gather information on the products sold, price schedules, etc. We find that rating agencies did exhibit features similar to those that have attracted considerable interest recently: namely, they did not react until the crisis had already begun and then implemented massive downgrades. We conclude by suggesting that, given the less than stellar record of the agencies, their emergence in the 1930s as a regulatory tool will have to be explained in future research.