Wednesday, May 19, 2010

Barnier to pin credit rating agencies under EU thumb

Original posted on EurActive.com:

EU Internal Market Commissioner Michel Barnier has told EU finance ministers today (18 May) how he plans to put credit rating agencies under the thumb of an EU agency, blaming the uncertainty in financial markets on the downgraded ratings of Greek and Portuguese debt.

Though the EU has already passed legislation regulating credit rating agencies such as Standard & Poor's and Moody's, it will table further proposals in two weeks' time. The new proposal will ask ask leaders to agree to put credit rating agencies under the centralised supervision of a new agency called the European Securities and Markets Authority (ESMA).

Barnier has presented his proposal to EU finance ministers at a meeting today (18 May) to discuss EU efforts to prevent further contagion from the debt crisis in the euro zone (EurActiv 18/05/10) and plans to regulate hedge funds.

In addition to the previous regulation, which would see rating agencies register in a central European database, the commissioner now wants EU regulators to have access to both the agencies' methodologies and to information on past ratings.

All of the above would ideally be operational by 1 January 2011, a Commission source said.

"We don't want someone getting a bad rating in one place and then going over the road to try their luck elsewhere," another Commission official told EurActiv.

Worries of ratings' contagion risks

Barnier's plans will likely strike a chord with the German and French leaders, Angela Merkel and Nicolas Sarkozy, who at the beginning of the month asked the European Commission to examine agencies' role in worsening the Greek debt crisis.

In April, Germany's Angela Merkel even indicated her support for the creation of a European credit rating agency to offset the dominance of the 'big three'.

"It is not normal for these rating agencies to play such an important role and to be so few in number," the commissioner said ahead of his presentation yesterday, reiterating concerns that a market dominated by three agencies, Moody's, Standard & Poor's and Fitch, badly needed new competitors.

"I am bothered by the automatic nature of the consequences made by ratings," he added, referring to the 1.5% fall of the euro following Standard & Poor's decision to downgrade the debts of Greece and Portugal at the end of April.

"The problem with Greece and with the banks was the same: both did not see the crisis in advance," a Commission official said in defence of more EU oversight of ratings and more competition.

In April, the European Commission sent a thinly-veiled warning to rating agencies urging them to act "in a responsible way" after Greek and Portugese downgrades (EurActiv 03/05/10).

"We would expect that when credit rating agencies assess the Greek risk, they take due account of the fundamentals of the Greek economy and the support package prepared by the European Central Bank, the International Monetary Fund and the [European] Commission," a spokesperson for Commissioner Barnier said (EurActiv 12/04/10).

Next Steps

  • June: Commission proposal on centralised supervision of rating agencies.
  • 1 Jan. 2011: Planned entry into force of new rules.

Background

Credit rating agencies entered the EU's firing line when the agency, Standard & Poor's decided to downgrade Greek debt to "junk" status, spreading widespread gloom across EU markets.

Credit rating agencies have been widely blamed for their role in the financial crisis which has swept the world since 2007.

They stand accused of over-evaluating borrowers' capacity to pay back their household loans in the so-called sub-prime crisis. They were also accused of potential conflicts of interest, because they are paid as consultants by the very banks whose debt they rate.

The failure of credit rating agencies to uncover the true value of securities, which were later labelled 'junk', has resulted in calls for greater regulation of the sector.

Despite some initial divergences on competence-sharing, EU governments and the European Parliament backed a tough line and supported increased oversight of a sector worth almost €4 billion and dominated by American multinationals, such as Standard & Poor's and Moody's (EurActiv 17/04/09).

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