Published November 15, 2011
The European Commission proposed new rules Tuesday to force credit rating agencies to disclose the methodologies and data they use to rate sovereign debt.
The new proposal could subject Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to European pressure, in turn suppressing information that might hurt the trading of sovereign debt.
The proposal would also let investors sue the ratings agencies for civil damages if they believe the ratings were “intentionally or grossly negligent.”
And the draft proposes to force the rating agencies to publish their ratings “after the close of business and at least one hour before the opening of trading venues in the EU,” the EU’s top market regulator said in a statement.
The ratings agencies have come under fire in Europe for causing market volatility and government borrowing costs to rise after downgrading the credit ratings for Portugal, Greece, Italy and Spain in recent months. European officials have also criticized the ratings agencies for rubber-stamping junk mortgage debt securities as triple-A.
The EU’s latest move to tighten government oversight of the ratings agencies also comes less than a week after France vehemently criticized Standard & Poor’s for mistakenly issuing a downgrade to France’s triple-A rating.
S&P blamed the erroneous downgrade on a “technical error.” The EU’s statement left it open as to whether S&P could be sued under the new proposed rules on ratings agencies.
S&P’s erroneous downgrade on France last week threw the equity, bond and currency markets into turmoil. Along with Germany, France’s triple-A is being used to back Europe’s bailout funds, which could involve issuing new debt. A downgrade to France could cause the bailout costs to soar.
S&P in a statement sharply criticized the new rules as shutting down important market information investors need to ascertain risk in Europe.
“Adding new rules that are out of step with other regulatory regimes will damage ratings as a globally consistent benchmark of creditworthiness," S&P noted in the statement, adding, "It will leave investors worldwide with fewer, lower-quality and less independent ratings on European debt."
Moody’s Investor Service and Fitch Ratings did not return calls for comment.
The EU’s market commissioner, Michel Barnier, said in a statement: "Ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens. They are not just simple opinions. And rating agencies have made serious mistakes in the past."
Barnier is an official with the European Securities and Markets Authority (ESMA), which regulates the markets as well as the ratings agencies in Europe.
Barnier added in his statement: “I have also been surprised by the timings of some sovereign ratings – for example ratings announced in the middle of negotiations on an international aid program for a country. We can't let ratings increase market volatility further. My first objective is to reduce the over-reliance on ratings, while at the same time improving the quality of the rating process.”
The European parliament has already moved to ban "naked" credit default swaps, a derivative used by Wall Street and traders overseas to bet on whether a country or company will default.
France, Italy, Spain and Belgium have also moved several months ago to temporarily ban the short-selling of certain stocks, particularly in financial companies. There is already a temporary short-sale ban in Greece and Turkey.
The EU’s new proposals on ratings agencies would also force governments or companies to rotate credit rating agencies after three years to stop potential conflicts of interest.
The EU, however, has held off for now on suspending ratings altogether on sovereign debt if countries feel the ratings undermine financial stability, particularly if they are receiving bailout help from the International Monetary Fund or the European Union.
It has also held off on a proposal that would let market regulators pre-approve the methodologies used by the ratings companies.