Why Three Private Companies Get to Decide How Much Your Government Pays to Borrow

On August 1, 2023, a press release from a private office in New York impacted the outlook for the world’s largest economy. Fitch Ratings, one of the three primary global credit agencies, stripped the United States of its AAA credit rating. The move served as a technical assessment of the nation’s fiscal trajectory, citing what the agency described as a steady “erosion of governance” over the last two decades regarding fiscal and debt matters.

For the broader population, sovereign credit ratings function as a macro-level version of a personal credit score. While a personal score determines the affordability of consumer loans and mortgages, sovereign ratings—issued primarily by S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings—dictate the borrowing costs for national governments. These ratings influence the funding of public infrastructure, social safety nets, and national defense. When these agencies adjust their outlooks, the bond market reacts, and the consequences eventually affect the broader economy through interest rate adjustments.

Today, the influence of these agencies is highly concentrated. Collectively known as the “Big Three,” they control approximately 95 percent of the global credit ratings market. They serve as the primary evaluators of the global financial system, categorizing which nations represent stable investments and which carry higher risk profiles.

Source: Council on Foreign Relations, OECD 2025

Methodologies: Quantitative and Qualitative Inputs

The process of evaluating a superpower’s creditworthiness involves a combination of statistical modeling and qualitative assessment. S&P Global Ratings, which maintains scores for 138 sovereign governments, evaluates a nation through five distinct pillars: institutional strength, economic structure, external liquidity, fiscal performance, and monetary flexibility.

This evaluation functions as a comprehensive diagnostic of a country’s financial health. The institutional assessment examines the reliability and predictability of government institutions. Factors such as political gridlock and recurring debates over debt limits are viewed by agencies as risks to a government’s ability to service its obligations. According to Fitch Ratings, the 2023 U.S. downgrade was driven by an expected fiscal deterioration over a three-year horizon and a high and growing general government debt burden.

Fitch employs a quantitative framework consisting of 18 variables to generate a “Sovereign Rating Model” score. This objective data is then adjusted by qualitative judgments from committee members. These judgments weigh factors that numbers alone may not capture, such as the effectiveness of a nation’s fiscal policy and the long-term sustainability of its political consensus on debt management.

Borrowing Costs and Market Impact

A rating downgrade typically correlates with an increase in the cost of borrowing. According to research from the International Monetary Fund (IMF), sovereign downgrades—especially those that move a country closer to “speculative grade”—can trigger nonlinear increases in interest rates on government bonds. This occurs because higher perceived risk necessitates a higher yield to attract investors.

The impact of these ratings extends beyond government treasuries. The yield on the 10-year U.S. Treasury note is a global benchmark for a wide array of financial products, including fixed-rate mortgages and corporate bonds. Following negative rating actions and outlook shifts in late 2023, yields on the 10-year Treasury experienced significant upward pressure. For a household seeking a home loan, these shifts in the benchmark rate can lead to substantially higher lifetime interest costs on a mortgage.

The scale of the global debt challenge is significant. OECD data shows that sovereign debt issuance reached nearly $16 trillion in 2024, with projections suggesting a rise to $17 trillion in the following year. A primary concern for economists is the “refinancing cliff.” By 2027, approximately 40 percent of all outstanding OECD sovereign bond debt is scheduled to mature. This will require governments to issue new debt to repay existing obligations, likely at the higher interest rates currently prevailing in the market.

Regional Trends and Market Perception

The influence of the Big Three is most apparent when observing the divergent fiscal paths of various nations. Ratings agencies have recently focused on persistent budget deficits and rising debt-to-GDP ratios across developed economies. In instances where debt trajectories are perceived as unsustainable, borrowing costs have increased relative to peers that maintain higher ratings, such as Germany or the Netherlands.

While developed nations struggle with legacy debt, emerging markets face a different set of pressures. Market data indicates that ratings agencies are often viewed as “pro-cyclical,” meaning they may lower ratings during economic downturns, which can exacerbate a country’s financial distress by making recovery more expensive. This dynamic has led to significant debate regarding the timing and necessity of downgrades during global crises.

Conversely, nations that demonstrate improved fiscal management and robust growth prospects can see their borrowing costs stabilize or decrease. The ability to attract foreign capital for infrastructure and industrial expansion is heavily dependent on maintaining a stable or improving credit outlook from the primary agencies.

The Accountability Gap and Regulatory Landscape

The concentrated power of the credit rating industry has faced ongoing scrutiny, particularly regarding the “issuer-pays” model. In this system, the entities being rated—whether they are corporations or governments—pay the agencies for the rating service. Analysts have pointed out that this creates a potential conflict of interest, though agencies maintain that their internal “firewalls” and the high-profile nature of sovereign downgrades demonstrate their independence.

Efforts to reform this system, such as those included in the Dodd-Frank Wall Street Reform and Consumer Protection Act, sought to reduce the financial system’s mechanical reliance on these ratings. Specifically, Section 939A required federal agencies to remove references to credit ratings in their regulations and replace them with alternative standards of creditworthiness. Despite these efforts, the Big Three’s ratings remains a cornerstone of the investment mandates for many pension funds and institutional investors, effectively maintaining the agencies’ role as market gatekeepers.

Furthermore, the rise of the private credit market—which has grown to an estimated $1.7 trillion—represents an alternative to traditional rated debt markets. However, for sovereign nations, there is currently no significant alternative to the public bond markets and the accompanying oversight of the major rating agencies. According to analysis from institutional bond desks, the lack of competition in the sovereign rating space ensures that the opinions of the Big Three continue to dictate the flow of trillions of dollars in global capital.

Looking Toward 2027

As global debt continues to rise, the relationship between sovereign governments and rating agencies remains a point of friction. The general government debt burden in many advanced economies has reached levels not seen in decades. According to data from Fitch Ratings, interest payments as a share of GDP increased in roughly two-thirds of OECD countries during 2024, a trend that places additional pressure on national budgets.

The 2023 downgrade of the United States and similar outlook shifts in other nations serve as a signal to fiscal policymakers. As interest costs represent an increasing share of government spending, the margin for error in fiscal management narrows.

For the public, these credit ratings are a reminder that national economies are subject to external evaluation by private entities. These verdicts shape the cost of homeownership, the stability of the labor market, and the long-term viability of national budgets. As the 2027 refinancing deadline approaches, the technical assessments provided by these agencies will remain a critical factor in determining the economic stability of nations worldwide.