MEPs are likely to reject the idea of a European approach to credit rating and have delayed a vote on the issue, highlighting difficulties in implementing a European Commission proposal that many lawmakers argue is unrealistic.
A vote due to take place today (7 June) on rating agencies was thrown back till 19 June amidst widespread rejection by MEPs of its contents.
Leonardo Domenici, an Italian socialist MEP who is drafting the Parliament's opinion on the issue, originally tabled amendments to the Commission’s proposal in order to push for the creation of a European credit rating agency.
His idea was firmly rejected by MEPs on the Parliament’s economic and monetary affairs committee, forcing Domenici to re-think, but his compromise proposals are now also set to be thrown out by MEPs.
Under the compromise, the EU institutions could carry out a “creditworthiness assessment” of countries, and would appoint a body to carry out this task within a certain time period.
Committee is against compromise
A source close to the committee told EURACTIV: “There is a clear majority against the idea.”
Exclusively European approaches to credit assessment were also rejected at a debate on the launch of an international non-profit credit rating agency (INCRA) in Brussels this week (4 June).
Annette Heuser, executive director of the Bertelsmann Foundation North America, argued that the ‘big three’ rating agencies Moody’s, Standard and Poor’s and Fitch, needed competition.
“We believe an alternative proposal is particularly necessary for sovereign ratings," she said at a debate hosted by the European Policy Centre (EPC) think-tank in Brussels.
"As the highest asset class, they’re the elephant in the room. They affect everyone, but they’re rated in an un-transparent manner and the indicators can be improved,” she said.
Bertelsmann has backed the publication of a new report – Blueprint for INCRA – that was discussed at the EPC debate.
Government officials lied to former Moody’s boss
Asked whether the European Economic and Social Committee could play a role by providing alternative credit ratings, Heuser said: “A European agency wouldn’t solve the problem either. It has to be international. It’s naïve to expect investors to accept ratings done in Europe when the bulk of investment is made in Wall Street or emerging markets.”
Elsewhere a former Moody’s chief laid blame for faulty ratings at the doors of governments, rather than agencies.
Vincent Truglia, formerly managing director and head of the sovereign risk unit at Moody’s Investors Service, told the meeting: “You need to be careful about all data, wherever it comes from. Look at the Greek government. It was [misreporting data]. We discounted Greek government data for years. But Eurostat just reproduces what governments say.”
Truglia added: “I’ve been lied to by more government officials than you can possibly imagine.”
“We’re saying that sovereign ratings are public goods affecting all sectors of society. All key societal actors must be integrated into the process,” said Annette Heuser, executive director of the Bertelsmann Foundation North America, suggesting that governments, corporates and foundations could provide financial support for the endowment, which she estimated would need to amount to $400m.
“You can have a European credit rating agency, but that wouldn’t solve the problem. You need an international one – there’s a strong demand for that in emerging markets,” Heuser claimed.
“The [INCRA] idea has a lot of merit,” said Mario Nava, acting director for financial institutions in the European Commission’s internal market department. “The Commission has issued a proposal for a new directive to reduce overreliance on credit rating agencies for investment decisions and boost competition – the market is extremely concentrated. We want an open market,” Nava said.
“The current situation is clearly a very oligopolistic market, so having one more idea is great. Two more ideas would be fantastic. In ten years’ time, we won’t have the same market structure for credit rating agencies. It must change. Anything that changes the oligopoly is good,” Nava claimed.
Credit Rating Agencies (CRA) were among the first to be regulated at European level in the aftermath of the 2008 financial crisis, reflecting the European Commission's view that they had failed to predict the the crisis and even helped make it worse.
These regulations, called ‘CRA I’, were adopted in 2009 and were later strengthened in May 2011 to become ‘CRA II’. CRAs are required to avoid conflicts of interest, to ensure the quality of their ratings and rating methodologies and to maintain a high level of transparency. CRAs also have to apply for registration in Europe.
In the midst of the sovereign debt crisis in November 2010, the Commission launched a public consultation which focused on over-reliance on external credit ratings, improving the speed and transparency of sovereign debt rating, making the markets for rating agencies more competitive and making agencies legally accountable in order to prevent conflicts of interest.
- 19 June 2012: European Parliament's economic and monetary affairs committee to vote on report on credit ratings agencies
- European Commission:Draft proposal for a regulation on credit rating agencies
- European Commission:Barnier’s statement after S&Ps mistake on France’s rating (11 Nov. 2011)
- European Commisison:Reaction to France’s erroneous downgrade (11 Nov. 2011)
- European Commission:Public consultation on CRAs
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