In a proposal, due to the tabled on 14 November, Brussels is also seeking to force financial services operators in Europe to regularly change the credit ratings agency (CRA) they use, in a bid to open up competition and avoid conflicts of interest.
On top of restructuring the business practices in the industry, the reforms propose giving wide-ranging powers to ESMA, the European markets regulator, to approve ratings methods and ban sovereign ratings in “exceptional situations”.
Under the proposals ESMA would be allowed to suspend ratings of countries in bail-out programmes so that adverse ratings are not issued at “inappropriate moments”.
Announcement of suspension would be a ‘big red flag’
“ESMA should be granted the power to temporarily restrict the issuance of credit ratings in exceptional, precisely defined situations,” the draft rules say.
The suggestion has come under fire from agencies and traders alike. “The suggested measures seem to take the attitude that there is one view of risk and that view should be controlled by ESMA,” Moody’s spokesman Daniel Piels told EurActiv.
He said that restricting CRAs from holding their own views will “not improve the quality of the debate on credit risks” and the suggested measures may increase systemic risk in EU markets by decreasing investor confidence, disrupting access to funds and adding to market volatility.
“Less available information will result potentially in more chaos,” said Domenico Crapanzano, managing director and head of euro sales and trading at investment bank Jefferies.
A source, within another leading CRA, told EurActiv on condition of anonymity that the move would compel the markets to rely on rumour instead of ratings, adding that "this will have a negative impact, the mere announcement that a rating was to be suspended would raise a big red flag over the country involved.”
Commission is sticking to its guns
The Commission remains convinced of the idea, however. An EU source told EurActiv that the plans are likely to be tabled on 14 November, and added that – although still in draft form and subject to changes – the suspension of agencies was likely to remain in the final draft.
The source said: “We should stress the exceptional character of this measure,” adding that the proposal “is not to ban automatically all ratings on sovereigns that are being rescued.”
Instead, the Commission planned to give ESMA “a tool among many others to intervene when circumstances require that, and such circumstances are very clear and strict,” the source added.
COMMENTS
Daniel sweetheart I have a few questions. As you know in days of old when banks were bold and AAA ratings were universal, your esteemed company and its mates placed just such ratings on 90% of all CDO (credit default options) and similar instruments. History shows that said instruments were worth somewhat less than used toilet paper. This raises the question: what incentives did the banks offer the CRAs to give AAA ratings to instruments that had, as it turned out, negative worth (believe me – I’m being charitable). Now don’t be shy, was it girls (or boys), booze, holidays, yachts – what? It must have been something – because those ratings did not come out of thin air or did they? Now you might argue, that was then and this is now. Ok so what has changed amongst the little helpers to the masters of the financial universe? Let me guess, the CRAs have discovered ethics, competence and honesty? (may be in a fortune cookie?).Of course you are right is noting that “restricting CRAs from holding their own views will “not improve the quality of the debate on credit risks” – what it might do is prevent your lot doing another ratings cock-up – but this time going the other way.
To finish, at this point a bit of humility from the CRAs would be nice – but I guess if nothing else the egos are still as bloated as ever – tell me – do you and your fellow CRAs have difficulty getting your heads through a normal door?
Suggestion to the EC, playing hard ball with the CRAs will go down well with the Euro public.
Regarding "A Tory Fox speaks" (see end of the article)
Tell me Foxy - baby - was it boys or girls in your case?? As I pointed out - the CRAs could not have "only offered an opinion" on 90% of CDOs AAA rated etc and to claim that this is "carefully considered" suggests that either you are deluded or you need to give me the name of your cigar supplier. Finally, as far as "accuracy" and CRAs are concerned I'll put that comment down to irony (you were being ironic wern't you?). & a parting shot - by any chance your electroate are not both blind & stupid - are they?
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