The Commission yesterday (25 October) defended proposals to suspend the activity of ratings agencies when necessary, attracting severe criticism from the industry over the issue.
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.
“The markets are implying lower ratings than the agencies themselves, who are effectively playing catch up. The world’s policymakers are defying reality, the money in the system has been lost or spent, it just is not there,” said Domenico Crapanzano, managing director and head of euro sales and trading at investment bank Jefferies.
For ESMA to take decisions on approving the methodologies could take up to six months, and this would ensure that there was only one view of credit risk, said a source within a leading credit agency – who preferred to remain anonymous.
He went on: “You will continue to have views outside the EU and these will become more volatile. If you shut down the tool of ratings agencies then traders will start to look elsewhere for their opinions, to market rumours which are much more volatile than ratings agencies.”
"This is no more than an attempt to ban bad news and criticism,” said UK Conservative MEP Ashley Fox.
“CRAs simply offer an opinion. No one is compelled to pay any attention to it. But of course the markets do pay attention because, on balance, the opinion is carefully-considered and usually accurate,” Fox added.
He concluded: "Of course what the Eurocrats really want is to have their own credit rating agencies. That way even Greece could have AAA rating. The only problem is the markets would never buy it."
One of the first set of rules proposed by the Commission after the 2008 crisis hit was specifically on Credit Rating Agencies (CRA), reflecting the fact they had clearly made mistakes in their appreciation of the risks of financial products and companies before the crisis.
These regulations are called "CRA I" (adopted in 2009) which were strengthened in May 2011 to become "CRA II". These require CRAs to avoid conflicts of interests, to ensure the quality of their ratings and rating methodologies and to maintain a high level of transparency.
Existing CRAs had to apply for registration by 7 September 2010 and have had to comply with the requirements of the regulation since then.
In December 2010, the European Parliament and the Council agreed on CRA II granting the European Securities and Markets Authority (ESMA) exclusive supervisory powers over CRAs registered in the EU.
The CRA II Regulation entered into force on 1 June 2011. Since July 1, ESMA is in charge of new registrations and the supervision of all credit rating agencies established throughout the European Union.
The Commission launched a public consultation in November 2010 which ran up to 7 January 2011. The Consultation focused on over-reliance on external credit ratings, improving the speed and transparency of sovereign debt rating, making the markets for ratings agencies more competitive, enabling the agencies to be pursued in court to prevent conflicts of interest.
The Commission is currently analysing all these issues and will propose an overhaul of existing legislation on 15 November.
In this context, the European Parliament adopted a resolution on 8 June 2011 welcomed by the Commission, in which it requests the Commission to analyse the creation of a European Credit Rating Foundation.
14 November: Commission expected to table proposals for further regulation of credit ratings agencies
EU official documents
- European CommissionConsultation on Credit Rating Agencies (CRAs), new initiatives
- European Commissionpress release on Commission proposal to amend Regulation (EC) No 1060/2009 of the European Parliament and of the Council on credit rating agencies
- European Commissionsummary of round table on credit rating agencies
- European ParliamentRegulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies