EU Seeks to Curb Big Ratings Firms After Portugal Downgrade
European policy makers lashed out at rating companies after Moody’s Investors Service cut Portugal’s debt to junk, reviving calls to curtail their clout.
German Finance Minister Wolfgang Schaeuble said the grip of the big three rating companies had to be broken when asked about Moody’s downgrade. “I have said before that we have to curb the influence of the rating agencies,” Schaeuble told reporters in Berlin today. There’s a need to “break up” the companies’ dominance, he said.
Moody’s four-level cut of Portugal’s credit rating yesterday cited French-led plans aimed at letting creditors of Greece cover part of the funding of a new rescue plan. Standard & Poor’s said a day earlier that it would rate Greece in partial default at least temporarily if those plans were implemented, a move that could put Greek banks at risk. The third big rating company is Fitch Ratings.
European Commission President Jose Barroso said he “deeply” regrets the timing and magnitude of Portugal’s downgrade by Moody’s and said proposals for increasing regulation of the rating companies in Europe would come out this year. The moves by Moody’s “do not provide for more clarity. They rather add another speculative element to the situation,” Barroso told reporters in Strasbourg today.
The commission, the European Union’s executive arm, “is looking into the regulation of rating agencies to determine whether there are some measures that need to be taken with regard to the prevention of possible conflicts of interest and other matters,” he said. “Developments since the sovereign- debt crisis show we need to take a further look at reinforcing our rules.”
Merkel Weighs In
German Chancellor Angela Merkel yesterday urged the commission, the European Central Bank and the International Monetary Fund not to leave judgments on creditworthiness solely to the rating firms.
“I also place my trust above all in the assessments of these three institutions when it comes to certain procedures,” she told reporters in Berlin.
The remarks rekindle European criticism of the companies that intensified as the euro-area debt crisis began last year. The three main companies also came under fire worldwide for assigning top ratings to U.S. subprime mortgage bonds, prompting Europe to put them under a special supervisory regime in 2009.
Following what policy makers called ill-timed downgrades of Greece and Spain last year, European officials have said that the New York-headquartered rating companies lack understanding of European economics and politics, and bemoaned the lack of a European company in that business.
European Ratings
“It seems strange that there is not a single rating agency coming from Europe,” Barroso said. “It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe.” Establishing a new agency is “a decision for the markets,” not politicians, he added.
The rating companies assumed a key role in Europe’s debt crisis in May, when ECB policy makers said the central bank would refuse to accept Greek bonds as collateral if any “burden sharing” by private investors produced a default rating. Last month, Germany shelved a plan to extend maturities on existing Greek bonds due to the ECB threat. It’s now reconsidering, a German government official said today.
Further regulation of credit-ratings companies is needed to diminish their “power and influence,” Michel Barnier, the EU’s financial services commissioner, said in an e-mailed statement.
“One can even question the need to rate countries undergoing” international rescue programs “seeing as they benefit from this support and protection,” said Barnier, who leads work on financial regulation at the commission.
The EU agency will present its proposals to strengthen regulation of credit-ratings companies “in the autumn,” Barnier said.
To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Jonathan Stearns in Strasbourg, France, at jstearns2@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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