Ratings agencies are again under attack, with EU leaders objecting that Standard & Poor’s, Moody’s and Fitch Ratings are an “oligopoly” which issues self-fulfilling prophecies of doom, greatly aggravating the eurozone debt crisis.
The EU’s Internal Markets Commissioner suggested a partial gag to prevent them from grading debt issued by EU economies being rescued with official funds.
There is also an undertone of critical comment that they are based in the US.
“We must first and foremost be more demanding on ratings of sovereign debts,” the EU’s Internal Markets Commissioner Michel Barnier said last Monday.
German Finance Minister Wolfgang Schaeuble said that verification was needed “to check if there is abusive behavior” by the agencies.
“We need to examine the possibilities of smashing the rating agency oligopoly,” he added.
At the Organization for Economic Co-operation and Development, chief economist Pier Carlo Padoan said that the agencies do not merely pass on information but “express judgments, speeding up trends already at work.”
“It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis,” he said.
Greece, Ireland and Portugal have all objected strongly to the fact and the timing of recent downgrades, and European Central Bank (ECB) president Jean-Claude Trichet recently said that the oligopoly was not an “optimal” arrangement.
There are calls from officials for the creation of a European ratings agency.
Barnier blamed the agencies for “a hike in the cost of credit, weakened states” and the possible contagion of the eurozone crisis to other economies.
However, diplomatic sources say that the agencies are being consulted at the EU level during tense talks on how to structure a second rescue for Greece, possibly involving a contribution from the private sector, in a way which would not trigger a default rating.
The agencies have warned that involvement of the private sector probably would trigger a default notation and the ECB has warned that in that case it might cease financing Greek banks.
However, some analysts were dismissive of Barnier’s suggestion.
“It’s a way of killing the messenger who brings bad tidings,” economist Nicolas Veron of the Bruegel think tank said.
Veron questioned whether this was the best option in Europe’s struggle to contain its sovereign debt crisis.
“What about institutional and company rating agencies in the countries concerned?” asked Cyril Regnat of France’s Natixis bank.
The EU proposal, he added, risked “adding uncertainty, volatility and further speculation.”
Carol Sirou, head of Standard & Poor’s in Europe, said ratings agencies were not “hotheads” and that their work did not intend to “feed fears uselessly.” It is not about throwing oil on fire, it’s about informing,” Sirou said.
This echoed a line taken in an interview in December last year by French national Marc de la Cherriere who built up a collection of small agencies and then bought US firm Fitch.
“In times of crisis we look for the scapegoat,” he told Paris Match magazine in December, referring to attacks on the agencies since the financial crisis. “We prefer accusing the messenger than examining our own conscience.”
Investors base key investment decisions on ratings, with notes going from a top grade such as “AAA” to “D” for default.
Vast numbers of investment funds, such as insurance and pension funds, are prevented under the terms of their contracts with investors from holding sovereign debt if it falls below a given credit standing.
The ECB uses the ratings when it accepts collateral, in the form of top quality eurozone government debt, in return for providing short-term refinancing to eurozone banks.
However, in response to the crisis, the ECB has stretched its rules and now accepts low-rated debt from weaker countries. It has also bought their bonds from private companies such as banks.
Credit ratings are issued in large numbers every day for myriad instruments issued by private companies, municipalities and utilities, as well as governments.
At Axa Im, credit analyst Chantana Sam said that a ban on agencies from analyzing sovereign debt from troubled countries would require a total redefinition of banking regulation, which revolves around the quality of debt assets held by banks on their balance sheets.
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