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Ratings Firms Face Tougher EU Rules on Sovereign Debt

European Union finance ministers and central bank heads will discuss whether government debt ratings “are necessary” as well as proposals to require more transparency on the assessments at a meeting tomorrow.

The “economic and political implications” of sovereign debt ratings mean “it is particularly important that ratings of this asset class be accurate, timely and transparent,” according to a copy of a proposal obtained by Bloomberg News that is scheduled to be presented at a meeting in Brussels tomorrow by the European Commission.

Ratings came under regulatory scrutiny after subprime mortgage securities with top grades helped fuel the worst financial crisis since the Great Depression. Pressure increased in Europe after Greece’s rating was cut to junk status in April, adding urgency to plans to bail out the debt-plagued nation.

“Concern has been expressed on whether the ratings of sovereign debt are necessary at all given the fact that there is already a large degree of transparency in the markets as regards the situation of government finance,” according to the document, dated Sept. 15.

Mark Tierney, director of communications at Standard & Poor’s in London, declined to comment. A spokeswoman at Moody’s Investors Service in London declined to immediately comment.

Moody’s today cut Spain’s top credit rating to Aa1 from Aaa citing weak economic growth prospects and “considerable deterioration” of the government’s finances. The move put pressure on Socialist Prime Minister Jose Luis Rodriguez Zapatero who is seeking parliament support for a plan to reduce government spending by 3 percent.

‘Imperfect Tool’

“Some investors believe that ratings may sometimes be an imperfect tool, but one that they still rely on,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. “If the EU and member states are going to stop using traditional ratings then the question is what do they replace them with.”

The European Union approved rules for credit rating companies last year, requiring them to adhere to a code of conduct to reduce conflicts of interest between issuers and rating firms.

The existing regulation doesn’t address problems such as an “over-reliance on credit ratings,” the “civil liability” of agencies or “the high degree of concentration” in the market for ratings of a small number of firms, the EU document said.

More transparent ratings “is a good thing, but it doesn’t make sense to move to a world where ratings aren’t used,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London.

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