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This chapter examines the transfer of financial aid through the use of the instruments of grants and loans or their combination. It suggests that the provision of aid is hard to justify because loans have been made to countries with low income, weak governance and high risk of default, while grants have been distributed across the spectrum of per capita income rather than being narrowly focused on high-risk countries. It contends that creditworthiness should affect the composition rather than the amount of the total resource transfer, such that a country with high absorptive capacity for aid but with low creditworthiness should receive large resource transfers in the form of grants.

The chapter discusses three myths that underlie current conceptualizations of money, credit, and creditworthiness. The first --that money is fungible--describes it as a neutral means of accounting for value, and a quantitative metric to compare qualitatively different commodities. The myth of banks as institutions of intermediation defines them as organizations charged with the allocation and distribution of scarce financial resources (capital). Finally, the myth of creditworthiness as objective assessment understands the criteria by which borrowers are granted credit as a function of the traits of the borrower: the better these criteria capture such underlying traits, the better the odds that the financial obligation will be met in the future. Each of these myths ignores how money, credit, and creditworthiness are always contested, with certain bankers striving to reinforce the boundaries drawn around each phenomenon, while other bankers strive to transgress those boundaries.

This chapter discusses the case of the United States in the 19th century, as part of a more general investigation of how the boundaries that define creditworthiness are delineated in democratic regimes. At the time, the creditworthiness of U.S. citizens was assessed and conceptualized on an individual basis, but this was a political construction, deriving from the nature of the polity, which was decentralized. As a consequence of political decentralization, and specifically fiscal decentralization, bankers strived to gain the support of local political authorities to construct boundaries around the allocation of credit which could be attached to sound banking. In the states of the North, where state governments were democratic, this dynamic was very different than in the states of the South, where relationships between banks and state authorities, relationships grounded in the slave economy, were more exclusionary.

In 19th-century Italy, fiscal and administrative centralization favored the wildcats, and in the struggle over creditworthiness that ensued, wildcats and conservative bankers fought by articulating more general criteria of creditworthiness than the privatized ones that took precedence in decentralized polities--such as the United States. The chapter focuses on the ways that Italian political elites dealt with international constraints on their capacity to borrow, in particular through their relationship with the Banca Nazionale, and a policy of budget austerity). The chapter also highlights the threats to sound banking deriving from the increasing democratization of the polity, and how the Bank of Italy responded to them by reframing creditworthiness in terms of the national interest.

This introductory chapter provides an overview of Brazil's early experience with sovereign borrowing and its relation to financial underdevelopment. It summarizes four topics that intersect with Brazil's experience: how new states create and sustain sovereign borrowing; access to an ever-increasing amount of long-term domestic capital; the way in which Brazilian creditworthiness came undone sixty-five years after the first London loan in 1824; and the relationships between creditworthiness and capital markets. The focus is on Imperial Brazil (1822–89), as this book addresses how the government could successfully commit to borrow without default, yet fail to achieve financial development of the type that would support sustained economic growth. Despite its success in establishing sovereign creditworthiness, Imperial Brazil was a remarkable failure in achieving the broader financial development required for modern economic growth. No revolution in private finance transpired despite the government's faithful servicing of its debt obligations over the decades and the creation of a vibrant domestic market in government securities.

This chapter focuses on the evolution of Brazil's credit risk between 1824 and 1889. It determines changes in the government's creditworthiness by reference to the default premium on Brazilian bonds traded in London and Rio de Janeiro. By locating persistent shifts using weekly data on bond yields, the chapter identifies key turning points in the evolution of the Empire's risk premium. It considers and rejects the hypothesis that Brazil's reputation for repayment was the chief determinant of the decline in country risk. In most instances durable changes in the pricing of Brazilian credit risk in the bond markets were related to domestic political events and foreign policy shocks, especially war. These created political and fiscal stresses that altered bondholders' expectations of the government's willingness to pay. Investors faced such episodes with apprehension and viewed their successful resolution with relief, as they repriced sovereign risk accordingly.

In 1889 the Republic fundamentally altered the principal characteristics of the political institutions—as well as the commitment to repay debt—established under the constitutional monarchy. This chapter summarizes the key discontinuities, which were evident in the political institutional changes wrought by the overthrow of the constitutional monarchy and also in the evolution of Brazil's capital markets. Following the replacement of the monarchy by a military government (which then segued to the oligarchic Republic), sovereign creditworthiness in the 1890s, along with fiscal and monetary policy, more generally began to founder. Bankers in London and Paris cut off existing lines of credit. The new regime quickly ran into great difficulty in securing new long-term loans in London. By 1898, faced with ongoing deficits, a milréis in free fall, and rapidly rising costs of external debt service, Brazil defaulted on its foreign debt, turning to its London creditors to reschedule its obligations. Over the same period, private finance in Brazil lurched along, supporting both the expansion of industry and the growth of the two main stock exchanges in Rio de Janeiro and São Paulo.

Credit was instrumental to the functioning of long-distance trade as oceanic merchants were both providers and consumers of commercial credit. Indeed, a significant portion of a typical merchant's assets consisted of accounts receivable. The commercial legislation of 1778, however, led to a dangerous expansion of credit due to the oversupply of colonial markets. To sell their imported wares, commercial agents in America were forced to extend greater quantities of credit to increasingly less creditworthy consumers, resulting in the growth of uncollectible debts and commercial instability. This chapter explores the provision of credit and the expansion of debt in the post-1778 era.

This chapter examines the concept of sovereign creditworthiness and related concepts, as well as clarifying the various purposes of sovereign borrowing. It analyses the various dimensions of the concept, including liquidity and solvency, gross and net debt, public and national balance sheets, productive debt, and its association with reputation. The chapter also looks at its problematic relationship with economic growth, an issue that is addressed in greater depth in later chapters. In addition, the chapter looks at the relationship of sovereign creditworthiness with informal hierarchy and status anxiety in international relations as well as with the notion of responsible sovereignty. It distinguishes core, periphery, and super-periphery states. Finally, the chapter addresses the association between sovereign creditworthiness and depoliticization and the latter’s justification by reference to moral and contractual discourses.

During the 1960s statistical credit scoring promised to make consumer credit evaluation faster and more efficient. Despite such advantages, however, many credit managers refused to embrace new risk-calculating technologies. Rather than viewing credit scoring as a welcome tool, skeptical professionals dismissed it as an inadequate substitute for human judgment. Such resistance centered upon long-held assumptions concerning the nature of creditworthiness. Creditworthiness, as defined in countless trade publications and instructional texts, was believed to be rooted in character, an elusive moral trait that could only be inferred through skilled face-to-face interviews with credit applicants. By eliminating the need for interviews, credit scoring subverted established routines and threatened the credit manager’s legitimacy. The history of internal opposition to credit scoring casts light on the deskilling and dehumanizing effects of algorithmic decision making as expert judgment was relocated to the black box of statistical computation.

This chapter examines the forecasting activities of consumer and corporate rating agencies as price anchoring on credit markets. Focusing on the subprime mortgage crisis in the United States, it considers the distinction between values and prices before turning to a discussion of the peculiarities of credit markets as markets for information. It then looks at five mechanisms that contributed to the intermediaries' failure in the subprime crisis: willful ignorance of the social construction of measurement, the omitted variable problem, correlated defaults, endogeneity of creditworthiness, and conflicts of interest. It views the market failure of the subprime mortgage market as a social process and suggests that the financial crisis was foremost a colossal failure of valuation.

You are creditworthy for φ‎-ing only if φ‎-ing is the right thing to do. Famously though, further conditions are needed too—Kant’s shopkeeper did the right thing, but is not creditworthy for doing so. This case shows that creditworthiness requires that there be a certain kind of explanation of why you did the right thing. The reasons for which you act—your motivating reasons—must meet some further conditions. This chapter defends a new account of these conditions. On this account, creditworthiness requires that your motivating reasons be normative reasons, and that the principles from which you act match normative principles.

This chapter studies the making of sovereign ratings, i.e. ratings about the creditworthiness of states, and underlines some of their economic and political effects. The rating companies’ market is oligopolistic and composed mainly of three large firms, Standard & Poor’s, Moody’s, and Fitch. This chapter shows the convergence of opinions about the willingness of states to reimburse their debts and their willingness to do so. Rating agencies are rather conservative, i.e. they tend not to change their ratings too frequently. This creates an environment of stability. As in the case of modernization theory (chapter 3), this favors inertia. In some cases, Credit ratings agencies prolong the present and delay the future. This happens when they don’t change their ratings of countries that face significant financial problems. In turn, investors are not dissuaded from disinvesting from these countries, thereby delaying national defaults.