EU Attacks Credit Rating Agencies, Suggests Bias

Wednesday, 06 Jul 2011 08:49 AM

 

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Europe issued a full-throated assault on credit ratings agencies on Wednesday, saying there were signs of bias against the European Union after Moody's downgraded Portugal's debt to "junk" status.

European Commission President Jose Manuel Barroso said Moody's decision to lower Portugal by two notches and maintain a negative outlook was fuelling speculation in financial markets. Europe was looking at getting away from its reliance on the mainly U.S.-based ratings companies, he added.

"Yesterday's decisions by one rating agency do not provide more clarity. They rather add another speculative element to the situation," Barroso told reporters, adding that the agencies were not immune to "mistakes and exaggerations."

"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," he said, stating publicly a view that many senior EU officials have pushed privately for some time.

It is not the first time during the sovereign debt crisis that the EU has taken the major agencies — Moody's, Standard & Poor's and Fitch — to task, but the message this time was delivered with a much greater sense of frustration.

Barroso's comments followed German Chancellor Angela Merkel's brushing aside on Tuesday of a warning from S&P, the largest agency, that it would view the current French plan for a partial rollover of maturing Greek debt as a default.

Such a move would narrow the options available to EU leaders to tackle the crisis and could greatly exacerbate the situation.

Merkel suggested the EU had depended for too long on the opinion of outside, private-sector agencies and said Europe had its own institutions that it needed to put its trust in.

"It is important that the troika (EU, IMF and European Central Bank) do not allow their ability to make judgments to be taken away," she said. "I trust above all the judgment of these three institutions."

TIGHTER RULES

Last year, the EU introduced rules that require the agencies to spell out how they come to rating decisions, such as a downgrade of Portugal. Barroso said further steps were in the works and would be outlined by the end of this year.

"We plan measures to improve methodology and transparency of rating of sovereign debt, to reduce excessive reliance by financial institutions on credit rating, to further reduce conflicts of interest and introduce more competition," he said.

"We are for instance looking at civil liability by the agencies," he said.
EU officials have frequently criticized the ratings agencies for being American, although in fact only Moody's and S&P are U.S.-based — Fitch has headquarters in both London and New York and is majority owned by a firm based in Paris.

There are moves afoot to have a Europe-based agency, although Barroso said no decision had been taken.

"I know that there are some possible developments regarding the possible creation of rating agencies originating in Europe," he said, without elaborating.

Before new laws are introduced, and policymakers don't expect them to be in place until the middle of next year at the earliest, there is little the European Commission or other parties can do to influence the agencies' decisions.

A pan-EU markets watchdog based in Paris has the power, however, to intervene if it sees failings in their work. It could withdraw their license to issue ratings, although such a drastic step is unlikely.

Under assault from several corners of Europe, ratings agencies have begun to push back against the criticism.

The head of S&P in Germany defended his company's work this week, saying: "It cannot be that S&P puts its more than 150 years of creditworthiness, credibility and predictability on the line to enable politically motivated push-ups," he said, referring to the political desire to prop up Greece.

© 2014 Thomson/Reuters. All rights reserved.

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