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.