UPDATE 2-France, Germany take aim at ratings agencies

* Merkel, Sarkozy back Brussels for ratings sector review

* Merkel, Sarkozy say more competition in ratings needed

* S&P says has duty to tell investors how it sees things

* Ratings users says policymakers taking aim at wrong target

(Adds ratings user reaction)

By James Mackenzie and Huw Jones

PARIS/LONDON, May 6 (BestGrowthStock) – French President Nicolas
Sarkozy and German Chancellor Angela Merkel took aim at major
ratings agencies on Thursday, saying the European Union should
look carefully at whether they had worsened the Greek debt
crisis.

“The decision by a ratings agency to downgrade the rating of
Greece even before the programme of the authorities and the
amount of the support plan were known prompts us to consider the
role of the ratings agencies in the spreading of crises,” the
leaders wrote in a joint letter to European Council president
Herman Van Rompuy.

The remarks are the latest in a series of criticisms aimed
at the big ratings agencies — Moody’s (MCO.N: ), Standard and
Poor’s (MHP.N: ) and Fitch (LBCP.PA: ) — for their role in the
financial crisis.

Merkel and Sarkozy said a review of the sector should be
launched and proposals should be considered to “reinforce
competition in the market for rating credit.”

They also said the European Commission should conduct a
“critical review of the sense of using agency ratings in
European regulations.”

In particular, the role of ratings in determining how much
capital a bank must set aside to cover risks, should also be
reduced, the letter said.

WITHOUT FEAR OR FAVOUR

Standard & Poor’s, the ratings agency singled out for
downgrading Greek debt as the rescue package was being put
together, rejected the criticism, saying its duty was to tell
investors how it sees things, without fear or favour.

“S&P’s rating of Greece in recent months has been
consistently more positive than that of the market – and that
remains the case today, even after our recent downgrade,” a
spokesman for S&P said.

“We have repeatedly pointed out that a bailout, while
addressing Greece’s near-term liquidity problems, does not
necessarily resolve its longer term solvency issues,” the
spokesman said.

Moody’s and Fitch had no immediate comment.

There have been repeated calls from European policymakers in
recent years for a home-grown agency to compete in the U.S.
dominated sector but with little progress.
Users of ratings, such as investment banks, said
policymakers are aiming at the wrong target.

“They should be focusing on getting stability back to the
market and a European ratings agency is not going to do that,”
said Mark Austen, acting chief executive of the Association for
Financial Markets in Europe.

AFME members include banks and primary market bond dealers
who use ratings.

“We are unclear how a publicly controlled ratings agency
would be independent to rate what is effectively its own debt so
that the market has confidence in it,” Austen said.

DARK MOOD

Jose-Manuel Barroso, president of the EU’s executive
European Commission, criticised on Wednesday what he called the
deficient work of rating agencies, saying they let the dark mood
in financial markets cloud their judgement. [ID:nLDE6442GI]

The EU’s financial services commissioner, Michel Barnier,
signalled on Monday that further rules may be needed but some
financial industry officials believe policymakers are trying to
cow the sector to stop more major downgrades of sovereign debt,
especially in Portugal and Spain.

Ratings agencies were slammed in the financial crisis for
giving high ratings to subprime mortgage-based products that
turned toxic and untradeable, and for being too slow in warning
investors.

This led to new EU rules being phased in from September
requiring ratings agencies to register and undergo direct
supervision if they want to issue ratings in the 27-nation bloc.

Eddy Wymeersch, chairman of the Committee of European
Securities Regulators (CESR), said last week a state-backed
agency could leave the EU open to huge liabilities.

CESR member Jean-Pierre Jouyet, head of France’s AMF stock
market regulator, said this week a public European agency would
not be credible outside Europe and preferred an international
one, perhaps guided by the International Monetary Fund.

Stock Market Trading

(Writing by James Mackenzie, Editing by Sudip Kar-Gupta, Ian
Jones)

UPDATE 2-France, Germany take aim at ratings agencies