Europe Really Doesn't Like Ratings Agencies

One worry that people have about ratings agencies is that they have conflicts of interest in which they are paid by bond issuers to rate bonds, so they have incentives to give bonds -- particularly those of frequent and high-paying issuers -- high ratings. One solution to this conflict of interest is not to have the agencies paid by issuers. That happens in sovereign ratings. European countries, which pretty much hate the heck out of the ratings agencies, do not pay them for their ratings. So you'd think that would avoid the main conflict of interest.

But not if you're the European Securities and Markets Authority, which today released its report on how evil the credit ratings agencies are about downgrading European sovereigns. The backdrop is that "when compared to historical trends, sovereign ratings assigned to EU member states have experienced high levels of volatility" -- because EU member states have experienced high levels of volatility in (market perceptions of) their creditworthiness, you'd think -- and that some people "have argued that sovereign rating changes helped exacerbate the financial crisis." So ESMA was sent to sort the agencies out and find flaws in their process of downgrading European sovereigns. Which it sort of did?