November 16, 2011

EU Plans to Shake Up Ratings Agencies

Moody's furious although blackout temporarily shelved

A new draft law unveiled Tuesday by the European Union angered ratings agencies Moody's, Standard & Poor's and Fitch, although according to Internal Market Commissioner Michel Barnier it is designed to inject competition into the sector, currently dominated by the "big three." Moody's issued an angry statement, despite the fact that the section calling for a ratings blackout has been temporarily postponed as details are worked out.

Reuters reported that the proposed law was introduced after many EU policymakers called for tougher rules for the sector and said that a ratings downgrade of Greek sovereign debt last year made it more expensive to provide Athens with its first bailout. Barnier withdrew the provision regarding ratings blackouts for countries in the process of being bailed out after objections from Britain and others, saying in the report, "I proposed a postponement on this to go further into the technical detail."

However, the three ratings agencies said that the law would limit choice for investors, and Moody's called it "dangerous." Michel Madelain, president and chief operating officer of Moody's Investor Services, told the newspaper Le Figaro on Wednesday that the law was bound to limit the "quality and independence" of the rating process.

He was quoted saying, "I see it as reflecting an obsession to challenge the rating process itself, and to hold rating agencies responsible for the European debt crisis. These proposals cannot make investors confident again nor facilitate the access of companies and European states to credit markets."

Despite the postponement of the blackout provision, Barnier still intends to see whether the European Securities and Markets Authority could still be given powers to intervene, and an EU official said blackout plans were "still on the cards."

Analysts, however, were relieved. Karel Lannoo, a financial expert with the Center for European Policy Studies think tank, was quoted saying, "If the rating of a country would have been prohibited, it would have prompted market panic. This idea was the weakest part of the proposal. But reason seems to have prevailed."

Although Moody's said a ban on credit ratings would signal investors that regulators have intervened to limit information and would reduce investor confidence further, and the Association for Financial Markets in Europe said "any ability for ESMA to suspend sovereign ratings may damage the independence of the credit rating agencies," the accidental downgrade of France's banking industry last week by Standard & Poor's has not exactly reassured investors of ratings agencies' dependability. The incident has also reinforced Barnier's determination to regulate agencies more closely.

Among other things, the law would allow investors to sue ratings agencies if they break EU regulations "intentionally or with gross negligence." The Huffington Post reported that the new law would place the burden of proof on the ratings agencies.

Credit rating agencies have said the ratings they issue are opinions protected by freedom of speech, but the European Commission has rejected that argument. Barnier was quoted saying, "Ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens. They are not just simple opinions."

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