The draft proposal due to be published tomorrow by Internal Market Commissioner Michel Barnier is still being debated internally at the European Commission after recent developments gave further arguments to those supporting tighter regulation.
On 10 November Standard & Poor’s, one of the three leading global credit rating agencies, issued an email that mistakenly announced the downgrade of France’s AAA rating.
The mistake was promptly corrected and the company quickly issued a press release confirming France's rating with a stable outlook.
But the correction proved insufficient to quell markets which had already been betting that France would soon lose its coveted AAA rating, lifting the country’s borrowing costs.
Barnier, who is a close ally of French President Nicolas Sarkozy, issued a strong rebuke the day after (11 November): “This incident is serious and it shows that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility,” Barnier said in a statement, adding: “All this strengthens my conviction that Europe must adopt strict and rigorous rules.”
Reacting to last week's mistake, Barnier said the Commission was going to propose “a European framework for civil liability in the case of serious misconduct and negligence.”
The draft regulation adds that if a mistake made by an agency has an “impact on a credit rating on which an investor has relied when purchasing a rated instrument, such an investor may bring an action against that credit rating agency for any damage caused to that investor.”
As already reported by EurActiv, the Commission will also propose giving the European regulator, the European Securities and Markets Authority (ESMA), the power to suspend the ratings of countries in bail-out programmes so that adverse ratings are not issued at “inappropriate moments”.
Finally, Brussels will try to further limit reliance on credit ratings and to increase competition in the sector through higher transparency and incentives for clients to regularly switch credit agencies.
EU agency ruled out for lack of credibility
Another option long considered in Brussels was to establish new agencies to rival the influence of privately owned US-based ratings services. For a while, the debate concentrated on creating a publicly funded agency that could specialise in certain types of ratings.
But this option now seems to have been ruled out. “Even if a publicly funded CRA may have some benefits in terms of increasing the diversity of opinions in the rating market and providing an alternative to the issuer pays model, it would be difficult to address concerns relating to conflicts of interest and its credibility, especially if such CRA would rate sovereign debt,” reads the draft regulation.
The European Parliament, which had initially backed the creation of a "credit rating foundation", is also strongly divided on the idea of setting up a public ratings agency. The Socialists said they would support the move if it had a chance of succeeding. The Liberals clearly oppose it, while the centre-right European People’s Party is split along national lines on the subject.
MEPs, who share legislative powers with the 27 member states on financial services regulation, are therefore moving towards a more cautious approach and suggest stripping private agencies of certain rating decisions, for instance on sovereign bonds.
“Sovereign debt should be rated by the European Court of Auditors. It’s paramount that sovereign debt rating will no longer pertain to credit rating agencies, which have too often destabilised the markets,” said the Parliament's Vice President Gianni Pittella (Socialists & Democrats).