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Europe raps ratings agencies

02 December 2013, 17:52 CET
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(PARIS) - The EU's securities market regulator on Monday rapped ratings agencies for numerous shortcomings in how they evaluate the creditworthiness of sovereign countries, but did not move to sanction them under new regulations.

"ESMA's investigation revealed shortcomings in the sovereign ratings process which could pose risks to the quality, independence and integrity of the ratings and of the rating process," said the European Securities and Markets Authority in a report.

The probe focused on conflicts of interests in the ratings process, safeguards to ensure ratings actions remain confidential until their release, and the adequacy of ratings staff.

The work was carried out before new European Union regulations came into force last June.

The review of the practices of Standard & Poor's, Moody's and Fitch -- which control 90 percent of the ratings market -- raised concerns about the independence of ratings action.

Paris-based ESMA found at least one instance of a member of a ratings agency's board of directors holding discussions with senior members of ratings teams on the appropriate actions to be followed or having a vote in ratings decisions.

It said it believed in certain cases senior management had driven ratings decisions, with limited or late-stage involvement by the lead analysts.

"In at least one instance, lead analysts received explicit guidance and opinions by senior managers as to the countries and the recommendations to bring to the rating committees," said the report.

ESMA also expressed concern that increased research activity was diverting sovereign analysts from their core tasks and increasing the possibility that research customers might be tipped off on ratings actions.

The regulator also criticised the lack of adequate procedures on notification of ratings actions and ensuring a real appeal process for the country affected.

In at least one ratings agency "ESMA observed several instances of disclosure of upcoming rating actions to an unauthorised third party, before publication and, in some cases, before the rating committee had taken place."

The EU tightened regulation of sovereign ratings agencies following several mass downgrades of European countries in 2011 and 2012 due to the eurozone crisis, which sparked criticism that the agencies were not looking sufficiently at the circumstances of individual countries.

There were also concerns ratings agencies did not have adequate staff to monitor countries sufficiently.

Credit ratings influence what countries pay to borrow money on debt markets, with many pension and investment funds bound by rules that prohibit them from buying debt of countries with low ratings.

New regulations tighten the rules on how ratings agencies operate, forcing them to make an in-depth analysis for each country hit by an action and banning direct policy recommendations.

Following the probe ESMA made numerous recommendations to ratings agencies, but said it had not yet determined whether there were any breaches of the regulations that could lead to supervisory or enforcement actions.


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