EU consults on sweeping changes to rating agencies

By Huw Jones

LONDON, Nov 5 (BestGrowthStock) – Credit rating agencies may have to
tell a country three days in advance if they plan to downgrade
its sovereign debt according to a European Commission public
consultation to be launched on Friday.

The European Central Bank or national central banks could
also be “entrusted” with issuing some ratings to increase
competition, the consultation document added.

Another idea is to limit publication of sovereign debt
rating changes until after the market close in Europe to help
smooth out shocks.

The Commission, the European Union’s executive body with
powers to propose laws, wants to dilute the influence rating
agencies have in financial markets.

Investors will face increased pressure to come up with their
own assessments of risks in securities like the government and
company bonds they want to buy.

EU policymakers are eager to prevent a repeat of Standard &
Poor’s demotion of Greece to “junk” status earlier this year,
which aggravated attempts to mount a rescue package for Athens
and win back confidence in the euro currency.

Apart from possibly requiring early warnings to countries
who face big rating changes to give them time to challenge any
“factual errors” agencies could also face having to disclose,
free of charge their full research on public debt.

EU states could also agree not to pay for sovereign ratings,
the consultation document said.

Europe and others in the world’s Group of 20 leading
economies (G20) are already implementing a pledge forcing
agencies to obtain authorisation and be more transparent.

The EU consultation concedes that completely eliminating
ratings from the calculation of bank regulatory capital
requirements does not appear to be a “realistic” solution.

Instead, a more practical approach could be to force banks
to obtain ratings from at least two different agencies to
improve accuracy, the consultation document said.

The consultation is part of the G20’s second front against
rating agencies.

The G20 summit in Seoul next week will also endorse global
recommendations on reducing reliance on ratings that will shape
the EU’s likely legislative response mext year.

The sector is dominated by just three agencies, Standard &
Poor’s (MHP.N: ), Moody’s (MCO.N: ) and Fitch Ratings (LBCP.PA: ) and
was badly tarnished in the financial crisis after highly rating
securitised products that became untradable, helping to trigger
firesales and bank rescues.

The EU consulation looks at ways to increase competition in
the “oligopolistic” sector but any initiative to create a
European rating agency should be carefully assessed to avoid
distorting markets or denting the quality of ratings, the
consultation document said.

The consultation also looks at whether a fundamental
conflict of interest whereby the issuer of debt pays for the
rating, can be avoided.

The European Parliament, which has joint say with EU
governments on financial laws, will begin drafting its
legislative wish list for rating agency changes next week to
shape the Commission’s thinking.

EU consults on sweeping changes to rating agencies