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Portfolio > Economy & Markets

EU Considers Censoring Credit Ratings

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In a quest to prevent further deterioration in the European credit crisis, the European Commission may ask for the authority to censor or ban credit ratings on troubled countries. Michel Barnier, former French foreign minister and now the European Union commissioner in charge of regulating finance, said of the move, “These rating agencies should probably be considered one of the causes of this crisis.”

Reuters reported that Barnier made the comment Thursday, calling the ratings “ill-thought-out,” after issuing on Wednesday a declaration that it was necessary to reduce dependence on the ratings agencies altogether. France is growing increasingly frustrated as Moody’s has threatened its triple-A rating might be in for a downgrade. Germany, too, is unhappy with the situation.

While such a ban could be difficult to enforce, worries are that any downgrade for France could endanger the European Financial Stability Facility, which is in the process of being strengthened. Only six eurozone countries have a triple-A rating, and if France loses its status, that could exponentially increase the cost of borrowing for the EFSF and throw the whole program into disarray.

Barnier added, “On rating sovereign debt, these knock-on effects on financial stability … can be negative. They can be made worse by ill-thought-out ratings, without knowing where the ratings have come from, without having the necessary dialogue with the country being rated.”

Speaking further of the proposal to ban ratings, Barnier said, “We are thinking about the timeliness of rating countries that are covered by international programs. Is it appropriate? If we don’t consider it to be appropriate, we could ban it or suspend ratings for the necessary timeframe.”

Several EU countries are frustrated with the ratings downgrades that have plagued peripheral countries, believing that those downgrades have intensified the crisis. Barnier was quoted saying, “These ratings are overrated. In all areas, be it in banking, in insurance, we need to reduce dependency on ratings and I want to act on those points.”

He added, “I think it is legitimate to have a specific, special treatment when a country is in negotiations or is covered by an international solidarity program with the IMF [International Monetary Fund] or European solidarity. And this is why I would like to say we are thinking about the timeliness of rating countries that are covered by international programs.”


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