EU Considering Ban On Credit Ratings For Crisis Nations

By: EW News Desk Team   Date: 21 October 2011

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21 October 2011

The European Union could impose regulations that would prevent credit rating agencies from judging the credit worthiness of countries undergoing bailouts, said the European Commission’s internal market commissioner Michel Barnier on Thursday.

"I think it's legitimate to have a special treatment when a country is in negotiation or is covered by an international solidarity program with the IMF or a European solidarity", said Barnier, as quoted by The Wall Street Journal.

In a report by Reuters, Banier is also quoted to have said that the European Commission was "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."

Related: Appetite For Self-Destruction: Have Rating Agencies Lost The Plot?

Related: Rating Agencies De-Stabilize Shaky World Political Economy

Under the proposal drafted by the European Commission, Brussels would also force issuers of financial products in Europe to regularly switch between the ratings agency they employ, so as to open up competition and avoid any conflicts of interest.

“The credit ratings agency engaged should not be in place for more than three years or for more than a year if it rates more than ten consecutive rated debt instruments of the issuer,” stated the draft, as cited by The Financial Times.

The proposal though, particularly those dealing with the ratings for countries, has been met with scepticism as most analysts believe that the measures would be near impossible to implement and regulated.

One industry figure told The Financial Times that most of the proposals were “wild” and would raise serious concerns over the independence of the work.

“We are not in the business of issuing other people’s opinions,” he said.

Kathy Jones, a strategist for Charles Schwab & Co. added that "you may not agree with the conclusion the rating agency comes to," but providing additional information is "how rating agencies are helpful."

"The fact that a country is in negotiations for help is a credible reason for a rating change," she said.

Not surprisingly, the big three rating agencies have come out in staunch opposition of the proposal.

A Moody's spokesman told that Wall Street Journal that a ratings ban would only serve to "undermine investors' confidence in European credits, disrupt access to capital markets for sovereign and corporate issuers, and increase volatility in the European credit markets."

S&P also warned that "restrictions on the publication of sovereign ratings could reduce transparency about credit risk and increase market uncertainty."

Related: Ten Things You Probably Don't Know About Credit Rating Agencies

"It would be a disturbing trend were the commission to begin restricting market opinions it deems politically unhelpful,” said a spokesperson for Fitch Ratings.


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