Brussels, 14/11/2011 (Agence Europe) - EU Internal Market Commissioner Barnier will be suggesting on Tuesday 15 November that the European Securities and Markets Authority (ESMA) should be allowed to ban the credit rating of sovereign debt in exceptional circumstances - when there is an immediate danger to financial stability, excessive volatility has led to changes in a country's credit rating and there are imminent changes to a country's budget situation due, for example, to negotiations for international aid. Other measures to be unveiled cover competition on the credit rating market, civil liability for rating agencies registered in the EU and transparency in the credit assessment methods used.
The Commission is revising, for the second time, the rules governing credit rating, a controversial issue against the backdrop of the eurozone's sovereign debt crisis. The Commission makes no secret of the fact that it wants to improve the quality of the assessment of countries' ability to pay back their debts (see EUROPE 10478). Along with the option of banning the rating of sovereign debt, the European Commission suggests that rating agencies in Europe should be obliged to publish a full credit assessment report whenever they publish or alter a rating and new ratings must not be published after trading has closed for the evening or within the hour before trading opens in the morning. Rating agencies must publish information about the staff involved in assessing a country and how much the agency gets paid for each type of asset rated, particularly sovereign debt. Sovereign debt ratings should be revised once every six months rather than annually.
In order to boost competition on market dominance by the Big Three (Standard and Poor's, Fitch and Moody's) the Commission wants to introduce a rotating system to force financial bodies to change their credit rating agency on a regular basis. Rating agencies would not be allowed to assess the same body for any longer than three years in a row, or one year if it is giving ratings for more than ten types of debt for the same body. There would also be a minimum time (the length of which has not yet been determined) during which a rated body would not be allowed to return to the same rating agency. These measures aim to reduce conflicts of interest in a system where the body being assessed pays for the credit rating, the “issuer pays model”. The Commission suggests that any shareholder owning at least 5% of rating agencies would not be allowed to buy shares in any other rating agency and mergers and acquisitions among major credit rating agencies would be outlawed.
No European credit rating agency. The European Commission is not planning to set up a European credit rating agency because it would not remove fears about conflicts of interest or the credibility of ratings, especially if is only issued credit ratings for sovereign debt, but it is planning to set up a network of rating agencies.
The draft legislation will introduce civil liability for rating agencies so that investors that feel they have been damaged by a rating can take the rating agency to trial for negligence or deliberate intent to cause damage. In order to make ratings more comparable, the Commission is considering setting up a European ratings index, EURIX, and a harmonised scale of ratings.
The accidental publication last week of a message from US rating agency Standard and Poor's to warn its clients about a downgrading of the French debt has provided extra ammunition to people calling for tighter regulations. This mammoth error, although later corrected, caused a hike in the yield for French bonds and came at a time of great volatility due to concern about the political and economic situation in Italy. The spiralling interest rates demanded for rolling over Italy's debt are making it more expensive for France to roll over its own debt because France is very exposed to the Italian economy. French and European regulators are investigating the Standard and Poor's incident.
The French finance minister said that the rumour was particularly shocking because it was absolutely unfounded. EU Single Market Commissioner Michel Barnier said it was a serious incident and demonstrated that key players in the market had to be disciplined and have a strong sense of responsibility. He said that the draft legislation he was preparing would reduce reliance on credit ratings, increase competition, boost transparency and discipline in sovereign debt ratings and set up a European system to ensure civil liability for serious negligence and fault. (MB/transl.fl)