A gag on ratings, to kill message or messenger, analysts ask
(PARIS) - Ratings agencies are again under attack, with EU leaders objecting that Standard&Poor's, Moody's and Fitch Ratings are an "oligopoly" which issues self-fulfilling prophecies of doom, greatly aggravating the eurozone debt crisis.
The EU's Internal Markets Commissioner suggested a partial gag to prevent them from grading debt issued by EU economies being rescued with official funds.
There is also an undertone of critical comment that they are based in the United States.
"We must first and foremost be more demanding on ratings of sovereign debts," the EU's Internal Markets Commissioner Michel Barnier said on Monday.
German Finance Minister Wolfgang Schaeuble said that verification was needed "to check if there is abusive behaviour" by the agencies.
"We need to examine the possibilities of smashing the rating agency oligopoly," he added.
At the OECD, chief economist Pier Carlo Padoan said that the agencies do not merely pass on information but "express judgements, speeding up trends already at work." He said: "It's like pushing someone who is on the edge of a cliff. It aggravates the crisis."
Greece, Ireland and Portugal have all objected strongly to the fact and the timing of recent downgrades, and the head of the European Central Bank, Jean-Claude Trichet, said recently that the oligopoly, meaning dominant position of a handful of firms, was not an "optimal" arrangement.
There are calls from officials for the creation of a European rating agency.
Barnier blamed the agencies for "a hike in the cost of credit, weakened states" and a possible contagion of the eurozone crisis to other economies.
However, diplomatic sources say the agencies are being consulted at EU level during tense talks on how to structure a second rescue for Greece, possibly involving a contribution from the private sector, in a way which would not trigger a default rating.
The agencies have warned that involvement of the private sector probably would trigger a default notation, and the ECB has warned that in that case it might cease financing Greek banks.
But some analysts were dismissive of Barnier's suggestion.
-- Shooting the messenger --
"It's a way of killing the messenger who brings bad tidings," economist Nicolas Veron of the Bruegel think-tank said.
Veron questioned whether this was the best option in Europe's struggle to contain its sovereign debt crisis.
"What about institutional and company rating agencies in the countries concerned?" asked Cyril Regnat of France's Natixis bank. The EU proposal, he added, risked "adding uncertainty, volatility and further speculation".
Carol Sirou, head of Standard and Poor's in Europe, said ratings agencies were not "hot heads" and that their work did not intend to "feed fears uselessly.
"It is not about throwing oil on fire, it's about informing," Sirou said.
This echoed a line taken in an interview in December by the Frenchman Marc de la Cherriere who built up a collection of small agencies and then bought US firm Fitch.
"In times of crisis we look for the scapegoat," he told Paris Match magazine in December, referring to attacks on the agencies since the financial crisis. "We prefer accusing the messenger than examining our own conscience."
Investors base key investment decisions on ratings, with notes going from a top grade such as AAA to D for default.
Vast numbers of investment funds, such as insurance and pension funds, may be prevented under their contracts with investors from holding sovereign debt if it falls below a given credit standing, and vice versa.
The European Central Bank uses the ratings when it accepts collateral, in the form of top quality eurozone government debt, in return for providing short-term refinancing to eurozone banks.
However, in response to the crisis, the ECB has stretched its rules. It now accepts low-rated debt from weak countries, and has also bought their bonds from private companies such as banks.
Credit ratings are issued in large numbers every day for myriad instruments issued by private companies, municipalities and utilities, as well as governments.
At Axa Im, credit analyst Chantana Sam said that a ban on agencies from analysing sovereign debt from troubled countries would require a total redefinition of banking regulation, which revolves around the quality of debt assets held by banks in their balance sheets.
-- EU measures hard to implement --
In any case, the proposals put forward by Barnier would be difficult to implement.
Legally speaking, how can an economic agent, meaning someone taking decisions, be prevented from giving an opinion without censorship, Veron asked.
He noted that stopping the agencies from rating certain countries would need the approval of the 27 EU member-states and the United States, home to dozens of agencies.
Freedom of speech is a constitutional bedrock in the United States.
But such a policy could give the EU some breathing room, as leaders "try to mask the fact that the larger countries will have to take out their checkbooks to save smaller countries," Philippe Dessertine, director of the High Finance Institute at the Univerity of Paris, said.
In some ways, the risk of default disappears without ratings, said Christophe Parisot, a trader at investment firm Aurel.
"Private creditors, insurers, banks won't have to immediately provision or downgrade their assets", he said, referring to regulatory and accounting rules governing the way assets are valued in the balance sheet.
This has a potentially vital effect on the amount of shareholders' funds a financial organisation must hold.
No longer rating a country under assistance "allows you to avoid the risks of crisis contagion because when Moody's downgrades Portugal, it's the peripheral countries such as Italy and Spain which suffer," Patrick Jacq, a senior strategist at BNP Paribas, said.
Text and Picture Copyright 2011 AFP. All other Copyright 2011 EUbusiness Ltd. All rights reserved. This material is intended solely for personal use. Any other reproduction, publication or redistribution of this material without the written agreement of the copyright owner is strictly forbidden and any breach of copyright will be considered actionable.