Saturday

1st Oct 2016

Barroso to ratings agencies: 'We know better'

Portugal-born EU commission chief Jose Manuel Barroso on Wednesday (6 July) accused American credit rating agency Moody's of being "biased" and "speculative" for downgrading its assessment of Portugal's debt payment capacity.

"Rating agencies are market players and as such they are not immune from market cycles, mistakes and exaggerations that come with them," Barroso said during a press conference in Strasbourg.

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Citing "formidable challenges" and a possible second bailout with private banks involvement, Moody's on Tuesday downgraded Portugal's credit rating to 'junk', meaning it is not safe for pension funds to buy Portuguese bonds.

"I deeply regret the decision of one rating agency to downgrade the Portuguese sovereign debt. I regret it both in terms of its timing and its magnitude," Barroso said, echoing remarks from Lisbon that the US-based agency had not taken into account the recently adopted austerity package.

"Yesterday's decision by one rating agency does not provide for more clarity, but rather adds another speculative element to the situation," he argued.

"With all due respect to that specific rating agency, our institutions know Portugal a little bit better. Our analysis is more refined and complete," Barroso went on, encouraging the Portuguese to stick to the agreed programme.

In his defence of Portugal's ability to pay back its debt, the former Portuguese premier said that both the German chancellor and the French finance minister recently had dismissed credit rating agencies and "made it clear that EU decisions on financial matters are based not on market players positions but on the objective assessments of the European Commission, the European Central Bank and the International Monetary Fund."

Ever since the beginning of the sovereign debt crisis, EU leaders have had a hard time convincing markets of the effectiveness of bailouts and austerity packages when it comes to the ability of countries like Greece and later on Ireland and Portugal to pay back their debt.

The credit rating market is currently dominated by the so-called Big Three - Moody's, Standard and Poor's and Fitch - all based in New York, except for the latter which also has headquarters in London and belongs to a French-owned parent company. Still, the EU feels under-represented and is now looking at strengthening regulations and possibly stimulating the emergence of a Europe-based rival.

An EU draft law is likely to be put forward by the end of the year to "improve the methodology of rating sovereign debt, reduce excessive reliance of financial institutions on ratings, reduce conflicts of interests and introduce more responsibility and competition [on the credit rating market]," Barroso explained.

While admitting that it is not for EU institutions or politicians to decide upon the creation of a Europe-based credit rating agency, Barroso did criticise the quasi-monopoly of the Big Three.

"It is quite strange that the market is dominated by only three players and not a single agency is coming from Europe. It shows there may be some bias in the market when it comes to evaluation of issues in Europe, that Europeans know better than others," he said.

Polish Prime Minister Donald Tusk, who was also present at the press conference as new chairman of the rotating EU presidency, poured some cold water on expectations that credit rating agencies would change behaviour.

"Only a naive person could have expected rating agencies to change into angels and have nothing else on their minds but ways of helping Greece or another country in trouble. Nobody establishes a rating agency in order to help anybody," he said.

New EU rules on financial products in limbo

A feud between MEPs and the EU commission is threatening to derail financial services regulation that would protect consumers from misleading investment products.

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