Commission targets rating agencies

Call to suspend credit ratings of countries in crisis removed from the Commission’s proposals to regulate rating agencies.

The European Commission today dropped a plan to stop credit-rating agencies issuing ratings on countries in financial difficulties.

Michel Barnier, the European commissioner for the internal market, had been planning to give the European Securities and Markets Authority the power to suspend the issuing of credit ratings of countries in exceptional circumstances, such as periods when they are receiving bail-outs.

That measure was, however, removed from proposals for the regulation of credit-rating agencies approved by the Commission today.

Barnier said he would return to the issue at a later stage. He said in a statement: “The possible suspension of sovereign ratings is a complex issue which we believe merits further consideration.”

Ashley Fox, a UK MEP from the European Conservatives and Reformists group, who has opposed excessive regulation of rating agencies, expressed “relief”.

“At least the Commission has stepped back from a position that could have created yet more mistrust in the markets,” he said.

The main aims of the proposals approved by the Commission are to reduce financial institutions’ reliance on ratings provided by rating agencies, to improve the quality of ratings and to introduce more competition into a sector that is dominated by three companies: Standard & Poor’s, Moody’s and Fitch.

Under the proposals, countries would be rated more regularly – every six months instead of once a year – and issuers would have to change their ratings agency every three years. For complex structured-finance instruments, ratings from two different agencies would be required. Ratings agencies would also be liable for harm they cause to an investor that relies on a rating.

Rating agencies have responded critically. Daniel Piels, head of media relations at Moody’s, said that the proposals were “inconsistent with the objectives of stabilising credit markets and strengthening investor confidence”. They would disrupt access to credit and increase market volatility in Europe, he said.

He added that forced rotation would “remove incentives to improve ratings quality and long-term performance”.