Friday

3rd Feb 2023

EU moves to rein in ratings agencies

  • Michel Barnier has asked EU finance ministers to consider curbing ratings agencies' powers (Photo: European Commission)

The EU commission on Monday (11 July) for the first time indicated plans to regulate ratings agencies after several run-ins over agency decisions about the credit reliability of ailing eurozone members.

Speaking in Paris, internal market commissioner Michel Barnier said the agencies occupied a place that is "far too important in Europe" and mooted a ban on ratings for countries covered by international rescue packages.

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"One can't just not take into account the fact that these Member States are members of a European Union, they benefit from the solidarity of its members; and they are subject to internationally agreed aid packages."

"That is why we should ask ourselves, in the same way as Madame Lagarde has, whether it is appropriate to allow sovereign ratings on countries which are subject to an internationally agreed programme," said Barnier, referring to an idea first suggested by former French finance minister Christine Lagarde, now head of the IMF.

The commissioner also said he is considering making it obligatory that a rating agency inform a government of its decision first and that the agency publishes its reasoning in full. Ratings agencies may also in the future be required to conduct full analyses of countries more regularly.

"CRAs must follow a methodology which is both specific and very rigorous when they rate sovereign debt, and they must be held accountable by supervisors," said Barnier.

The commission has been grumbling about what it sees as the too-powerful role of ratings agencies for months but matters came to a head last week when Moody's, one of the three major international agencies, downgraded Portugal's credit rating to 'junk'. It made the move directly after Lisbon had agreed new austerity measures.

It provoked a strong reaction from EU commission chief Jose Manuel Barroso who questioned both its "timing" and its "magnitude" and suggested it was based on only superficial analysis.

Brussels has in the past suggested that a European ratings agency should be created, pointing out that the big three - Moody's, Fitch and Standard and Poor's are all international.

However, analysts suggest such an agency will have an immediate credibility problem if it is perceived as being too close to governments.

And while ratings agencies have been getting much bad press in Europe for some time - German finance minister Wolfgang Schaeuble has spoken about "smashing" their "oligopoly" - they were strongly defended by the Financial Times' influential commentator Wolfgang Muenchau on Monday.

"We have to thank the rating agencies for giving the eurozone's policymakers a clearer vision of which strategies are feasible, and which are not," he wrote in a piece entitled: 'Don't blame Moody's for a messy euro crisis.'

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