Cause and Effect in European Politics and Law

MEPs Will Propose a Temporarily Ban on State Credit Ratings

Ralitsa Kovacheva, Desislava Dimitrova, November 23, 2011

How to better regulate the work of credit rating agencies (CRAs), so that they do not cause problems on the markets - this issue was debated by MEPs in the Committee on Economic Affairs in the European Parliament with EU Competition Commissioner Joaquin Almunia and Internal Market Commissioner Michel Barnier.

The European Commission has recently proposed new rules for the credit rating agencies, aiming to reduce reliance on credit ratings, ensuring clearer and more frequent sovereign ratings, reducing conflicts of interest and making CRAs more accountable for the ratings they provide.

Presenting the new proposal, Commissioner Barnier noted that the ratings "are not just simple opinions. And rating agencies have made serious mistakes in the past." Agencies are often accused of not simply not having foreseen the financial crisis, but that they have in fact contributed to it, giving the highest credit rating to financial instruments of dubious quality.

"We can't let ratings increase market volatility further. My first objective is to reduce the over-reliance on ratings, while at the same time improving the quality of the rating process. Credit rating agencies should follow stricter rules, be more transparent about their ratings and be held accountable for their mistakes. I also want to see increased competition in this sector," Commissioner Barnier said.

The new proposal complements legislation submitted by the Commission in July 2011. Then the tension between the EU and rating agencies reached its peak after the agencies threatened to declare a Greek default if there was a restructuring of Greek debt. This provoked many European politicians and even some commissioners to make sharp remarks on the CRAs, and Commissioner Michel Barnier even called for a ban on the ratings for bailout countries. While presenting the new legislation the Commissioner recalled the problem of "the timings of some sovereign ratings – for example ratings announced in the middle of negotiations on an international aid programme for a country."

The proposal, however, does not provide for a ban of sovereign ratings for countries in exceptional market circumstances. The Commission noted only that "the possible suspension of sovereign ratings is a complex issue which we believe merits further consideration." However, new rules require Member States to be rated more frequently - every six months rather than 12 months.

MEPs expressed their dissatisfaction with the lack of such a ban and said they would propose amendments to the text of the Commission. Jean-Paul Gauzes MEP (EPP, France) said that eurozone countries should be protected in troubled markets. It would not be the first time that the Parliament would improve a Commission's proposal, Commissioner Barnier said in response. He gave the example of a regulation restricting short selling and trading of credit default swaps (CDS), adopted by Parliament. According to the new rules, CDSs can only be traded when the relevant bonds are available too, which would reduce speculation with sovereign debt.

Michel Barnier stressed the need for clear rules for the work of the CRAs, so that their evaluations be exact, transparent and credible. He recalled the case when the French credit rating was "mistakenly" reduced by the Standard & Poor's rating agency. This happened at a time when the subject of French AAA credit rating was a very sensitive issue and the "news" caused shocks on the markets, raising French funding costs dramatically only in few hours. After this incident we found out that the rating agencies have subscribers who receive information in advance. It is not normal there to be privileged market participants, the commissioner noted.

According to his colleague Joaquin Almunia, who met with members of the economic committee earlier on Tuesday, the malfunctions in the work of the CRAs were not an antitrust problem, but rather there were problems related to conflict of interest and nontransparent methodology. He said this in response to a question of Elisa Ferreira, MEP (S&D, Portugal), who indicated that 97% of the market was dominated by three agencies (Moody's, S&P and Fitch), while two of them having largely the same shareholders. Commissioner Almunia explained that the Commission had examined all aspects of the agencies'' work but found no reason to start an antitrust investigation.