EU hits back at credit ratings agencies

Amhran Nua

The European Union appears to be taking a dim view of the havoc wreaked by credit ratings agencies with their recent downgrade of various European countries' ratings.

EU warns credit rating agencies

A European Commissioner has warned it may be necessary to further regulate the role of credit rating agencies. Michel Barnier, in charge of revamping financial services, told the European Parliament he had been surprised by the rapid deterioration of Greece's rating. A new regime for agencies, demanding they explain how downgrade decisions are made, will begin in December and Mr Barnier said this may be strengthened.

He also said he was considering a new agency to rate governments' credit.

'Considerable' power

"I think we need to go further to look at the impact of the ratings on the financial system or economic system as a whole," said Mr Barnier. "The power of these agencies is quite considerable not only for companies but also for states," he added. "That's why I asked for responsibility to be assumed in the work they are doing. "If you look at Greece, for example, I was quite surprised by the quite rapid deterioration in rating."

Ratings agency Standard & Poor's downgraded Greek debt to "junk", leaving it effectively cut off from the financial markets. The three big agencies - Standard & Poor's, Moody's and Fitch - occupy a position of power at the heart of global finance.

Sub-prime role

Critics of the rating agencies point out that they are so powerful that their judgements become self-fulfilling prophecies. A downgrade can push fund managers into selling government bonds they hold, or refusing to buy newly issued bonds. That pushes down the price of the bonds and raises borrowing costs in future, which puts further strain on the government's finances and could - theoretically - lead to further downgrades.

In recent months Greece has been fighting a desperate and unsuccessful battle to avoid this kind of vicious circle. This has irked many officials in Brussels and, as a commissioner, Mr Barnier has the power to decide how rating agencies are allowed to do business.

Last year the big three of Standard & Poor's, Fitch, and Moody's admitted that their assessment of securities backed by sub-prime mortgages had turned out to be incorrect.

There isn't much question that a showdown between the EU and the agencies can only end one way, I wonder what effect this might have on EU-US relations though? Either way if they push ahead with this none-too-veiled threat, it will be quite a scuffle.

ei.sdraob

Looks like they are scrambling to find an escape goat

blame everyone but the Greeks, classic

marco_polo

ei.sdraob wrote: »

Looks like they are scrambling to find an escape goat

blame everyone but the Greeks, classic

No doubt you are right about the motivation, however at any other time the commission may have had a valid point to some degree.

Escape goat?

Scofflaw

marco_polo wrote: »

No doubt you are right about the motivation, however at any other time the commission may have had a valid point to some degree.

Escape goat?

Like a Trojan Horse, but for getting out of things rather than into them.

cordially,
Scofflaw

marco_polo

Scofflaw wrote: »

Like a Trojan Horse, but for getting out of things rather than into them.

cordially,
Scofflaw

Ah I see, a quick google and trip to Urban Dictionary reveals I am not down with the cool kids anymore

At least I pass the 'never watched Big Brother' test though.

Scofflaw

marco_polo wrote: »

Ah I see, a quick google and trip to Urban Dictionary reveals I am not down with the cool kids anymore

Yes - looking things up reveals exactly that, I'm afraid.

cordially,
Scofflaw

ei.sdraob

marco_polo wrote: »

No doubt you are right about the motivation, however at any other time the commission may have had a valid point to some degree.

I don't know, where was their motivation when Enron and sub-prime bonds where given good status

They only "upped" their tone recently when they had to open up chequebooks

There is a sad trend happening with this whole Greek affair, everyone is being blamed: the Germans, bankers, investors and now Ratings agencies

everyone but the Greeks and their government :rolleyes:

marco_polo wrote: »

Escape goat?

Oh oops was late at night, tho funny in hindsight

Flamed Diving

Would this be the same agencies that "gold-starred" those mortgage derivatives, in the US?

Blame, where blame is due.

Scofflaw

ei.sdraob wrote: »

I don't know, where was their motivation when Enron and sub-prime bonds where given good status

They only "upped" their tone recently when they had to open up chequebooks

There is a sad trend happening with this whole Greek affair, everyone is being blamed: the Germans, bankers, investors and now Ratings agencies

everyone but the Greeks and their government :rolleyes:

The Commission avoids publicly criticising Member States except when it has been formally agreed to issue a warning within the terms established by the Treaties - they are otherwise ultra-cautious about it.

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

The Commission avoids publicly criticising Member States except when it has been formally agreed to issue a warning within the terms established by the Treaties - they are otherwise ultra-cautious about it.

cordially,
Scofflaw

looks like they have gone on an all out offensive, this news is really troubling here

http://www.bloomberg.com/apps/news?pid=20601010&sid=azNNZZQK3AQI

Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.

so if you dont like what the credit rating agencies are saying (for all their ****ups at least they are still free from government interference)

you create your own puppet

Genius!

next step create a Ministry of Truth and edit out all the bad news out of the media :pac:

Flamed Diving

Who rated all those quality mortgage derivatives, way back when?

silverharp

Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.

The EU should be thankful that the rating agency "cartel" is so weak in their ratings. Hedge funds would have discounted the ratings and hence the facts way ahead of the "official" downgrade. Any state endorsed rating agency is only going to be weaker again and open to political pressure "in the public interest of course!"

lmimmfn

surely in the eurozone part of the EU it should be EU bonds only rather than individual countries and the individual countries only trading bonds with the ECB?

Do individual states in the US trade state bonds outside of the US?

ei.sdraob

he second prong of the EU attack on the markets is the incessant blabber about the need to set up an EU-own rating agency. Here, the promised might is clearly unmatched by any sort of internal capability:

1. The EU itself cannot certify own annual accounts, despite having only in-house own auditors. Even these are refusing to sign off on EU accounts for over a decade now. How can the same institution produce a credible rating agency that will be entrusted with providing assessment of the EU credit worthiness?

2. Can the EU-imposed metrics be seriously treated as fundamental benchmarks for solvency? Give it a thought – the EU oversees a union of member states bound by own sovereign treaty to uphold the Maastricht Criteria targets. The EU has failed to enforce these in the case of Greeks, Portuguese, Spaniards, French, Italians, Belgians and so on. In other words, the EU cannot enforce its own rules, let alone police economic and fiscal performance parameters required to issue any sort of risk assessments. Letting the EU run a rating agency is equivalent to letting an alcoholic run a bar!


3. The entire idea of an EU rating agency traces back to Merkel’s and Sarkozy’s desire to shift blame for the Greek (and indeed PIIGS) debacle off the shoulders of the European governments and Brussels and onto the shoulders of ‘speculators’ and the Big-3 rating agencies. Of course, the logical inconsistency of the EU attacks on the Big-3 is painfully obvious. The Big 3 are accused for failing to properly recognize and publicize risks to the systemic solvency of financial institutions in the case of ABS/MBS and so on. Yet, the minute the rating agencies actually do their jobs – as in the case of PIIGS in recent months – they are standing accused of… well… doing the jobs only to well? Can anyone have any trust in a ‘rating agency’ set up by the very people who are simply and evidently incapable of a simple logical argument?

Mrs Merkel have stated this Friday: "Those who created the excesses on the markets will be asked to pay up -- those are in part the banks, those are the hedge funds that must be regulated ... those are the short-sellers and we agreed yesterday to implement this more quickly in Europe." Obviously, over a decade of fiscal recklessness across the PIIGS was never a problem for Mrs Merkel. And she is supposed to be the reasonable one?

source


the bit in bold is better expressed than my ramblings earlier

I dont see how creating an own credit rating agency puppet will help improve trust and confidence in EU and its states

its like pouring oil into a fire

lmimmfn wrote: »

surely in the eurozone part of the EU it should be EU bonds only rather than individual countries and the individual countries only trading bonds with the ECB?

will find out tomorrow

lmimmfn wrote: »

Do individual states in the US trade state bonds outside of the US?

they issue bonds alright (im not sure of details), take a look at California who are junk rated and not getting help from federal govt...

thebman

silverharp wrote: »

The EU should be thankful that the rating agency "cartel" is so weak in their ratings. Hedge funds would have discounted the ratings and hence the facts way ahead of the "official" downgrade. Any state endorsed rating agency is only going to be weaker again and open to political pressure "in the public interest of course!"

Your point is valid but works both ways. Credit rating agencies not located in the EU would be open to political pressures from where ever they are located against the EU if it was in that locations interest.

The political pressure will exist no matter where they are located. So best to have them in a number of regions so one can't be way off base with another.

silverharp

thebman wrote: »

Your point is valid but works both ways. Credit rating agencies not located in the EU would be open to political pressures from where ever they are located against the EU if it was in that locations interest.

The political pressure will exist no matter where they are located. So best to have them in a number of regions so one can't be way off base with another.

The more the better but if there is too much regulation surrounding them they will be "rear view mirror" agencies. The current mechanism is flawed as its the issuers that fund these agencies. It should be the portfolio managers etc funding these guys so that they can get an over the horizon opinion.

ei.sdraob

Its all about trust

the existing rating agencies dont have much trust left in them, but they still have their place and markets still listen to them

will anyone trust an EU puppet agency?

to put into perspective, imagine if Zimbabwe created a rating agency, would anyone trust or pay attention to its "ratings" :P

baalthor

The criticism of the rating agencies in the past was that they over-rated certain companies.

Now the EU says the agencies are doing the opposite with Greece and other countries i.e. under-rating.
How likely is this to be true? And if it is the case then surely "ballsy guys" can make a fortune buying Greek debt