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European governments seek to limit powers of rating agencies

Ministers fear summary downgrades could threaten economic stability in the eurozone

Richard Northedge
Monday 24 October 2011 22:57 BST
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European governments and the credit-rating agencies are heading for a showdown. While the rating firms threaten further damaging downgrades to eurozone country loans, the European Commission is planning punishing regulations to curb the agencies' power.

The clash is the backdrop for today's European Council meeting in Brussels, when eurozone ministers will thrash out their position for the G20 summit in Cannes in 11 days' time.

The commission will this week ask its President, José Manuel Barroso, to consider banning agencies from rating countries, such as Greece and Portugal, which have been bailed out. The hope is that preventing downgrades will limit the damage.

Then, shortly after the Cannes summit, the commission will publish proposals that could make agencies liable for "incorrect" ratings and require them to give governments three days' notice of changes in their debt assessment, rather than the current 12-hour warning.

The moves come as the three main agencies – Standard & Poor's, Moody's and Fitch – continue to reassess eurozone sovereign debt. The credit ratings of Portugal, Spain and Italy have already been cut; Belgium's was put under review last week and Moody's warned that France risks losing its top AAA rating. The agency has already slashed Greece to CA.

The ratings – agencies' opinions of borrowers' creditworthiness – affect the cost of issuing new debt, and France's rose by 0.6 per cent last week.

The EU has recently passed laws requiring credit-rating agencies to be registered and allowing them to be fined. But the Commissioner for Internal Markets, Michel Barnier, said last week: "Although the existing legislation is a step in the right direction, the eurozone debt crisis has highlighted the need for more to be done."

His new proposals follow consultations conducted over the past year. He is concerned that investors rely too much on agencies' ratings rather than their own assessments. Mr Barnier also questions their independence when the company or country issuing the bonds pays for the ratings. He is promising an overhaul of legislation this autumn.

The agencies oppose many of the proposals, especially giving governments an extended warning that their rating will be cut. A Standard & Poor's spokesman said: "The commission proposal for a three-day notice period could undermine the independence and timeliness of sovereign ratings, creating more uncertainty for investors. It may also increase the risk of market abuse."

But Mr Barnier is considering going further, by banning ratings for bailed-out countries. "The commission believes there should be a debate as to whether it would make sense to suspend ratings of countries who benefit from an internationally agreed aid package," he said. "We will be asking the President to consider scheduling a debate on this issue, and others relating the credit-rating agencies."

The President, born in Portugal, is likely to be sympathetic, having criticised the rating agencies when they downgraded his country this summer. But the conflict between EU ministers and the agencies means some fear the firms are under pressure to avoid downgrading troubled countries in the hope the legislation will be relaxed – or that they will be punished with tougher laws.

A Standard & Poor's spokesman said: "We recognise that our views are sometimes unwelcome to the issuers we rate and to officials; but if our opinion of creditworthiness changes, it is our duty to investors to say it as we see it. This is very clearly what we have been continuing to do in recent weeks and months."

Despite the pressure, Moody's last week warned France that it risks a downgrade. Senior credit officer Alexander Kockerbeck said the government's debt is now among the weakest of AAA-rated countries such as the UK, Germany and US. Although France's ability to service its debt is high, he said the country will be affected by investors' confidence.

"France may face a number of challenges in the coming months – for example, the possible need to provide additional support to other European sovereigns or to its own banking system," he said. "The French government now has less room for manoeuvre in terms of stretching its balance sheet than it had in 2008."

The attacks on credit-rating agencies come as their own finances are stretched. On Thursday, McGraw Hill, US owner of Standard & Poor's, reported a 6.1 per cent fall in the subsidiary's third-quarter operating profit. The chairman, Harold McGraw III, partly blamed the eurozone crisis. European corporate issues fell by 52 per cent compared with last year, and high-yield issues – junk bonds – by 76 per cent. Income from new US bonds has fallen 45 per cent since S&P downgraded Washington's debt from AAA this summer.

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