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European Rating Agency Plan Founders on Lack of Financing

An effort to establish a new global ratings firm to challenge Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings has foundered after the initiators failed to obtain the 300 million euros ($393 million) needed to get the project off the ground.

Negotiations with a private European group of investors ended without agreement, putting an end to the project to found the European Rating Agency, Frankfurt-based Chief Executive Officer Markus Krall said in an e-mailed statement today.

ERA was seeking to gain from a backlash against S&P, Moody’s and Fitch, whose issuer-based payment model raised the question of a conflict of interest that critics said meant they may have fanned the financial crisis by inflating grades on securities backed by subprime mortgages during the U.S. housing boom. Their downgrades of euro-region states drew the ire of policy makers trying to resolve Europe’s sovereign debt crisis.

“Despite existing promises, we were unable to reach critical mass for the start,” Krall said.

Krall’s model used a non-profit foundation approach that would have removed the potential for a conflict of interest. The effort failed in part because a lack of legislation meant it had no legal basis, he said.

ERA was conceived more than three years ago, when, in response to the financial market crisis, Roland Berger Strategy Consultants GmbH sought to identify the institutional conditions that may have increased systemic risks.

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