Colombia’s Tax Reform Reveals the Hidden Power of Credit Agencies Throughout the Americas

Aug 10, 2021
1:56 PM

Soldiers and army tanks guard toll booths on the outskirts of Bogotá, Colombia, Tuesday, May 4, 2021. (AP Photo/Fernando Vergara)

By Thomas Power and Cruz Bonlarron Martínez

BOGOTÁ — At the end of July, the administration of Colombian president Iván Duque began the process of introducing a new tax reform bill to the Colombian legislature. The bill has been criticized by opponents for failing to tax the ultra-rich, favoring industries that are closely aligned with the President’s party base, and giving relief to tax evaders among other issues.

But the government is treading carefully after its previous tax reform, which put taxes on food and basic services—igniting enormous opposition across the country this past April. The previous reform engulfed the country in protests that left at least 80 people dead and many more injured. The protest crackdown led to international calls for the Colombian government to reform its security forces due to the extreme Human Rights violations committed during the protests.

Credit Crackdown

There are many factors that incentivized the Colombian government to introduce a tax reform this year and many factors that incentivized a violent response. A major factor came from recommendations by credit rating agencies. Newspapers headlines showed Moody’s Investment Service had issued a warning that it may downgrade Colombian bonds to junk status if it didn’t, among other things, implement a tax reform.

“The extent to which a tax reform proves effective in raising revenue on a permanent basis will be a major factor influencing Colombia’s fiscal prospects and its credit outlook,” Moody’s wrote.

Ultimately, Colombia’s rating was downgraded to junk bond status in early July.

Giovanni Rodríguez is a researcher with the National University of Colombia and has written extensively on credit rating agencies. He says that on a practical level recommendations made by these agencies aren’t necessarily taken seriously by bankers and financiers, who have their own analysts but are taken seriously by policymakers. In years past, Colombian finance ministers have pointed to their good ratings by the credit rating agencies as a source of international legitimacy. So when Moody’s threatened to downgrade their bonds to junk status, it’s likely something the Duque administration took seriously.

“Credit rating agencies try to have a qualitative and scientific vision for rating sovereign debt,” Rodríguez told Latino Rebels. “They have very practical methodologies which are easy to follow. But in the end. these agencies, far from making objective ratings, use ratings that are based in political and subjective logic.”

The tax reform that Moody’s is hoping that the Colombian government will pass includes a value-added tax with other taxes that will hit poor and middle-class families the hardest.

“If they increase indirect taxes like the sales tax, this is going to hit the poorest the most, and all this in a country as unequal and poor as ours is going to generate a time bomb—a bomb of social protest,” Rodríguez said. Even after the May and June protests, there are some protests still happening in Colombia’s major cities.

Credit rating agencies such as Moody’s have a long history of influencing policy in Latin America and the world over, subordinating democratic will to the interest of financial markets and sparking protests in response.

What Credit Rating Agencies Do

A credit rating agency is a private firm whose expertise lies in being able to accurately determine the credit risk of companies and sovereign states. This credit risk is seen as the ability or willingness of a company or state to fulfill its credit obligations, generally using a scale of AAA (the highest rating) to C (the lowest rating). Moody’s Investment Service, Standard & Poor’s, and Fitch Ratings account for 95% of the market share for these firms.

A country’s credit rating will determine the interest rate for its debt and is highly correlated with increased Foreign Direct Investment. This makes policymakers in countries like Colombia take their ratings seriously, giving these agencies a great deal of power and influence over the domestic policies of ostensibly sovereign states.

“I like to say they are the enforcers of neoliberalism. They have an immense amount of power, even though they have been discredited time and time and again… but they still actually have real power,” said Saqib Bhatti, the Co-Executive Director of the Action Center on Race and the Economy (ACRE), a nonprofit that researches the connection between racial justice and Wall Street accountability.

Some of the factors for a country’s rating are macroeconomic, like economic growth or low public debt. While credit rating agencies do rate things such as the strength of a country’s institutions, they will also rate what they believe a country’s willingness to pay back debt, putting a potentially political tint to their ratings.

“They end up commodifying entire countries… all they are concerned about is how much value you can extract so that’s why the well-being of the people who live there isn’t really relevant, it’s actually seen as an obstacle,” Bhatti said.

Something credit rating agencies haven’t factored in as much are aspects such as environment or the social good. By rating macroeconomic factors, they are tilted towards the needs of investors.

Another criticism has been their “issuer-pays” model, in which the companies and countries pay the credit rating agency for their rating. Experts testifying to the Security and Exchange Commission (SEC) have said this practice creates a conflict of interest.

One example critics cite is the 2008 financial crisis. In the years preceding the crisis, credit rating agencies assigned mortgage-backed security a AAA rating, implying that these securities were very safe. In 2006, agencies received $881 million dollars from “structured finance” to rate their securities, including mortgage-backed securities.

The agencies claim there was no conflict of interest because employees did not receive compensation based on the ratings, and that decisions were made by committees and not individuals. The 2010 Dodd-Frank act attempted to regulate these agencies.

They were also criticized by the European Union for placing obstacles to resolving the Greek debt crisis. Even while the EU states had agreed to a bailout for Greece, S&P said it was considering this a “selective default,” further raising borrowing costs.

“We can’t have private companies, whose primary goal is maximizing profit, behaving like sovereign judges passing down opinions that are binding for disinterested third parties,” Thomas Straubhaar, the director of the Hamburg Institute of International Economics told Deutsche Welle.

“That’s why I say it ends up reinforcing the inequities that already exist, and in some ways, they’re the muscle behind economic imperialism and neoliberalism because they end up penalizing places that have already been exploited,” Bhatti said.

This is also true in places under direct U.S. control, such as the unincorporated territory of Puerto Rico.

The Broken Promise

Puerto Rico is one of the most extreme examples of the power that credit rating agencies have over governments. On June 30, 2016, this power culminated when President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law. The law created an unelected seven-member fiscal control board (or la junta as it’s called in Puerto Rico) to supervise and amend the Puerto Rican government’s economic policy in order to facilitate the repayment of Puerto Rico’s debt.

The board was initially composed of seven members, including both Republicans and Democrats, appointed by President Obama. These original members came almost exclusively from the financial sector or closely related sectors. Today, five of the seven members have connections to the financial sector.

The Board has included various controversial personalities include the current Board president David Skeel, who stated in a Wall Street Journal op-ed that his work on the board was “the most Christian activity” he’s engaged in, and the former president José Carrión III, who has been heavily criticized for his relationship with Banco Popular, a bank that according to Puerto Rican activists, has played a big role in creating Puerto Rico’s debt crisis.

The board also hired Natalie Jeresko, the former Finance Minister of Ukraine, to serve as the executive director for a controversial sum of $625,000 a year and reimbursements for expenses.

PROMESA, much like the fiscal reform in Colombia, has its origins in threats that were made by credit Rating Agencies to downgrade the territory’s credit rating following the start of an acute economic crisis in 2006. In response to these threats, governor Luis Fortuño passed the controversial Law 7 in 2009 to satisfy creditors’ hunger for austerity.

The law resulted in the layoff of 30,000 government workers, an end to collective bargaining rights for public workers, and an intensification of privatizations started by other administrations. Fortuño’s austerity measures led tens of thousands of people to take to the streets of San Juan in protest and a prolonged strike at the University of Puerto Rico that shut down the university for various months.

Yet, these measures did not stop Credit Rating Agencies from downgrading Puerto Rico’s debt to junk in 2014 leading governor Alejandro García Padilla to announce that Puerto Rico’s debt was unpayable, pushing the country further into a financial crisis and leading to even more austerity and privatization through the establishment of the Fiscal Control Board.

Rocío Zambrana, Associate Professor of Philosophy at Emory University and author of Colonial Debts: The Case of Puerto Rico, calls PROMESA a reatriculation of the colonial condition.

“PROMESA reinstalls and adapts to the colonial condition. It installs the fiscal control board to do debt restructuring, aiming for financial health, reentering capital markets, and so on. The fact that the board is appointed by a law of the US Congress, while Puerto Rico is an unincorporated territory. Puerto Ricans have no vote in that congress” Zambrana said.

According to Zambrana the situation of Puerto Rico shows “how credit agencies downgrading credit to junk status generates a political situation of capture and predation. They operate in a predatory way that sustains and reproduces this racial violence which includes everything from precarity and expulsion to other forms of inequality”.

The Colonial Legacy of Debt

The colonial relationship with debt that Zambrana speaks of dates back to the Haitian Revolution, when the former slave colony was forced to pay for their freedom and the loss of supposed economic revenues France had to endure due to Haitian independence.

Yet, even within U.S. borders debt is often racialized, according to Bhatti, “City governments in the U.S. that have larger populations of people of color generally have lower credit ratings.” Bhatti continues to highlight how low credit ratings create a cycle of dispossession and austerity in communities of color that continues to hinder their recovery and seeks to punish them despite the irony that the austerity only hurts their ability to pay back debt.

While credit in itself is a very abstract concept, the consequences and the people that it affects are very concrete realities. The cases of communities of color in the United States, Puerto Rico, and Colombia demonstrate this because their credit is connected to their history and their relationships to financial markets in the United States.

According to Bhatti, these credit rating agencies help augment human rights violations: “People think of it as a moral report card almost, which is just wrong because what they judge you on is largely immoral. If you do bad things to your people to please investors, you get better ratings.”


Thomas Power is an investigator and writer based in Bogotá, Colombia. He is a candidate for a master’s in Political Studies from Colombia’s National University and was an International Human Rights accompanier with Fellowship of Reconciliation. Twitter: @ahbueno55.

Cruz Bonlarron Martínez is an independent writer and researcher based in Bogotá, Colombia. Twitter: @cruzbonmar.