The Risk-Free Rate of Return in the Politics of Global Finance

This paper analyzes the notion of risk-free rate of return as it is present in professional financial practice and in certain regulatory debates. Using pragmatist approaches in political anthropology and in the anthropology of money and finance, the paper tries to map out certain roles and meanings of this concept and of some of the things it refers to. The paper will address the use of the concept in financial formulas in financial practice, its more or less explicit connection with AAA rated assets, both as an abstract measure of financial value and as concrete assets that can be bought and sold and that are part of regulatory requirements. The aim of the paper will be to spell out the different temporalities and institutions that are brought together by the concept in its different uses, their connections and disconnections, as a way to question the global political narrative that it allows for, and the alternatives that it precludes.

In general terms, the notion of a risk-free rate of return, referring to the sovereign debt of certain rich countries, connects with the idea that these states will always be able to pay their debts, i.e. that it will always be able to extract taxes to do so, and that creditors come before taxpayers in a specifically political power relation. This implies that the sole fact of owning capital is considered to ensure a minimal state guarantee of returns.

It is this sovereignty-based concept that is fundamental in the valuation financial assets found in manuals and in everyday financial professional practice. In this context, the concept defines the minimum return that an activity must offer in order to be even considered as a financial asset. The concept works not only as a stabilizer of the definition of “financial value” itself, but also as a principle of discrimination in the allocation of credit by the finance industry. I will analyze this in the case of the weighted average cost of capital, a fundamental formula for the pricing of future cash flows and stocks.

Finally since the last crises in the US and Europe, several regulators, such as the IMF and BIS, have called into question the notion that there exist some states that are risk-free, just as the concrete volumes of AAA rated assets for sale experienced important variations. This poses difficult questions for regulation and for financial practice. These difficulties are important to understand the rationales of legitimization of the role of the financial industry in the global production and distribution of money.

The paper will map the circulation of these entries, which imply different institutions and practices, but connect with each other through common narratives, found in manuals, regulatory discourse and the press, and constantly refer to each other in a fluid web with particular contradictions, fragmentations and taboos.