Ratings firms warn of risks if Commission gets tough

Barnier wants to crack down on ratings agencies but firms say measures will disrupt the markets.

Credit-rating agencies are stepping up their fight against European Commission plans to overhaul their sector, claiming that the changes envisaged could damage financial markets.

Michel Barnier, the European commissioner for the internal market and services, has frequently criticised agencies for their role during the financial crisis. He wants to dilute their influence and break up what he terms “cosy” relationships that agencies have with some issuers of credit. He is expected to announce legislative proposals on 15 November – which will be the Commission’s third attempt to regulate credit-rating agencies.

The proposals could “raise systemic risks” in European financial markets, according to Michel Madelain, the president and chief operating officer of Moody’s, one of the big three agencies. In a letter to Barnier and to the finance ministers of the member states, seen by European Voice, he warned: “When taken as a whole, the combination of the measures proposed will, if implemented, disrupt access to capital markets for European sovereign and corporate issuers, increase volatility in the European credit markets, and contradict the key policy objective of reducing reliance on ratings.”

Controversy particularly focuses on one of the Commission’s projected measures: obliging issuers to rotate the rating agency they use. Officials see this as a stimulus to competition and an encouragement to smaller agencies to challenge the dominance of the big three of Moody’s, Fitch, and Standard and Poor’s. A draft version of the legislative proposal suggests that a credit-rating agency may not return to the same issuer within four years.

Madelain said that this would take an “important comparative tool away from the global investing community and be very disruptive to the flow of capital to European investors”.

The Commission sees the proposals as a necessary step to break up what it considers an oligopoly that has abused its dominance, and on whose opinions too many investors place excessive reliance.

However, in a recent analysis, Bruegel, a Brussels-based think-tank, questioned the Commission’s approach. “Both theory and experience suggest that regulation generally reinforces barriers to entry in concentrated markets, and there are no reasons to believe the market for credit ratings is an exception,” said the report’s author, Nicolas Véron. “Tighter regulation and/or supervision are unlikely to address the problem of market concentration. If anything, they could make it more intractable.”

Suspensions

Another contentious element expected to appear in Barnier’s proposals is granting powers to the European Securities and Markets Authority (ESMA) to suspend credit-ratings of countries in exceptional circumstances, such as periods when they are receiving bail-outs.

Speaking on 20 October, Barnier said that this “special treatment” was legitimate. “If we consider it to be appropriate, we could ban it [the publication of ratings] or suspend it for the necessary timeframe,” he said.

Despite the criticism from the ratings agencies, Barnier refuses to be dissuaded from his planned course of action. He has targeted the industry for years and believes that, particularly during the financial crisis, he can win popular support.

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