Published October 20, 2011
The European Union's executive may ask for powers to censor credit ratings for countries in crisis, its financial reform chief said on Thursday, describing a ban as one way of stopping fallout from "ill-thought-out" ratings.
The proposal, which officials cautioned may be impossible to police, would be the most stringent curb yet on rating agencies and highlights frustration in France, which was this week warned by Moody's that its top rating was under threat, and Germany.
"These rating agencies should probably be considered one of the causes of this crisis," said Michel Barnier, the former French foreign minister who is now the EU commissioner in charge of regulating finance.
"We are thinking about the timeliness of rating countries that are covered by international programmes. Is it appropriate? If we don't consider it to be appropriate, we could ban it or suspend ratings for the necessary timeframe."
The EU Commission plan, outlined in a draft EU law, is part of a shake-up of EU rules governing the rating agencies, which have downgraded several euro zone states in recent months -- decisions that some EU leaders say have worsened the crisis.
Barnier's suggestion comes at a crucial juncture in the euro zone debt crisis, ahead of meetings of EU and euro zone leaders expected to agree on plans to end the market turmoil.
Any downgrade of France could have profound implications for the euro zone's rescue scheme, the European Financial Stability Facility, which relies on the triple-A rating of just six euro zone countries, including France, to borrow cheaply.
"On rating sovereign debt, these knock-on effects on financial stability ... can be negative," Barnier said.
"They can be made worse by ill-thought-out ratings, without knowing where the ratings have come from, without having the necessary dialogue with the country being rated."
Experts, however, were sceptical about his plan to ban publication of ratings.
"A rating is an opinion," said Nicolas Veron, co-founder of Brussels think tank Bruegel. "I think politicians overestimate the impact of rating decisions and underestimate the impact of their own statements, which often move the markets more."
"There is a freedom of expression issue here. I fail to see how banning opinions will do anything to help financial stability."
Under the Commission proposal, which forms the basis for EU law, ESMA, the European markets authority, would get powers of enforcement to silence the rating agencies if their views could upset markets.
But it is unlikely the European authorities could enforce any ban on the two most important agencies, Standard & Poor's and Moody's, which are based in the United States.
"This is an extraterritorial issue," said one official. "We can't force the U.S. to implement such legislation, but nothing can prevent us to propose such legislation for Europe."
Barnier's proposal would need approval from EU member governments, including Britain, and from the European Parliament to take effect.
The rules, if they were to be adopted, would affect countries such as Ireland and could complicate their route back to normal borrowing on the markets.
Moody's also criticised the idea.
"Proposals such as these will undermine investors' confidence in European credits, disrupt access to capital markets for Sovereign and corporate issuers, and increase volatility in the European credit markets," said a spokesman for the ratings agency.
(Additional reporting by Julien Toyer in Brussels and Huw Jones in London; Editing by Mike Nesbit and Helen Massy-Beresford)