As rumours (scurrilous, nonsense – Ed.) swirl in the market of a French rating downgrade, Citigroup’s chief economist Willem Buiter is considering a much bigger issue – a world without any AAA G7 sovereigns.

The criteria applied by the rating agencies to the G7 sovereigns in the past have been, in our view, far too lenient. As argued in Buiter (2010) and Buiter et. al. (2011), the post World War II period has seen a combination of gradually eroding tax administration capacity, diminishing tax compliance in the private sector, and the evolution of political decision-making institutions, processes and practices that make it possible to mandate public spending without ensuring sustainable funding for these expenditures. This is bringing to end the period during which for a number of advanced industrial and post-industrial countries, the sovereign automatically represented the best credit risk in its jurisdiction and an AAA rating for these sovereigns was considered natural – almost a right. Only a few small countries with a surviving culture of tax compliance and political institutions that effectively impose the government’s intertemporal budget constraint may have AAA ratings in the not too distant future. Read more