Q+A: Why and how is the EU leaning on credit raters?

BRUSSELS (BestGrowthStock) – The European Union is exploring a second wave of rules to control credit rating agencies, amid what some analysts see as a political campaign to intimidate the industry and discourage the downgrading of fragile EU countries.

WHY IS BRUSSELS WORRIED ABOUT CREDIT RATING AGENCIES?

Investors remain nervous about the creditworthiness of countries like Ireland, and the cost of insuring Irish debt against default has risen to record highs. That casts doubt on its ambitions to borrow on debt markets next year.

Officials in Brussels are worried that any further upset, such as a downgrade of the country’s credit rating, could push borrowing costs unfeasibly high and ultimately force a reluctant Dublin to tap an emergency EU safety scheme.

They 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.

Europe’s politicians have been openly critical of the credit rating agencies and last month summoned executives including Moody’s chief Michel Madelain and S&P’s President Deven Sharma for a grilling before finance ministers.

The European Commission has told the agencies to watch their step when judging a country’s financial health, saying it will probe their work and could even set up a rival rating agency.

Belgian Finance Minister Didier Reynders, whose country currently holds the rotating EU presidency, recently called for fines if rating agencies make the wrong call.

Independent experts have derided attempts to control the sector. “Breaking the thermometer is nonsense,” said Nicolas Veron of Brussels think-tank Bruegel.

HOW HAVE EU RULES FOR RATINGS AGENCIES CHANGED?

The EU has already introduced rules that will require ratings agencies to register with a new European watchdog to be set up early next year.

The law gives the European Securities and Markets Authority the power to levy multi-million euro fines, and the muscle to launch raids on an agency’s premises to probe its work.

The EU watchdog will not be able to question a downgrade, but could object to the way it was arrived at, by challenging whether or not analysts considered all relevant factors.

Although the new watchdog, which is controlled by EU country supervisors, may resist pressure from European capitals, the ratings industry fears political interference as it prepares applications for registration to work in Europe.

DO THEY FACE FURTHER CURBS?

Michel Barnier, the European commissioner in charge of financial reform, aims to change the rules for rating agencies again next year, and begins industry consultations this week.

The agencies are worried they could be stopped from rating European countries or that their publication could be curbed.

Barnier is also considering the creation of an EU rating agency to challenge the dominance of S&P, Moody’s Corp. and Fitch Ratings.

S&P and Moody’s are based in the United States. Fitch, though owned by Fimalac of France, is perceived by some to have strong U.S. links, with its chief executive based in New York.

Just as Washington has done, Barnier wants to dismantle rules that use credit ratings to determine how much regulatory capital a bank needs to set aside to cover lending risks.

There is also a question over whether ratings of U.S. firms like S&P would be recognized in Europe under the new EU regime.

IS PRESSURE FROM BRUSSELS PUTTING THE BRAKES ON DOWNGRADES?

Direct comparisons are hard to draw between Greece, whose credibility was destroyed after it faked economic data, and Ireland, which some analysts view as a more agile economy.

Both are struggling with debt mountains as big as their annual economic output, but their ratings are quite different.

S&P and Moody’s rate Greek debt as junk, on a par with countries like Pakistan. Ireland is rated many notches higher by both agencies, although each has its rating under review for a possible downgrade, and remains solidly investment-grade.

While many in the industry acknowledge there is political pressure to be softer on struggling European states, they insist ratings are not being influenced.

“If that were to become investor perception, that would be very dangerous for them,” said Bruegel’s Veron.

A spokesman for S&P underlined its independence: “If we believe creditworthiness has changed, our duty to investors is to say it as we see it.”

Moody’s says it also disregards borrower identity: “Moody’s ratings are our view on an issuer’s credit risk. They are both objective and unbiased, regardless of who the issuer is.”

Q+A: Why and how is the EU leaning on credit raters?