Brussels, 15/11/2011 (Agence Europe) - Due to lack of enough support among European commissioners, EU Internal Market Commissioner Michel Barnier has had to drop his idea of allowing the European Securities and Markets Authority (ESMA) to temporarily suspend the rating of sovereign debt for struggling countries (see EUROPE 10494). He said on Tuesday 15 November, as he unveiled a draft directive to change the rules governing credit rating agencies registered in the European Union, that he thought that more time was needed to flesh out the technical details of how the directive would apply in practice and more work was needed on the innovative idea to draw up criteria for ESMA for such decisions. Nevertheless, he repeated his view that publication of ratings for the debt of countries in receipt of international aid added to the financial instability at times.
Alongside opposition from countries like the United Kingdom and Sweden, the financial industry has been lobbying hard against the idea, saying that banning credit rating for struggling countries would have the reverse effect by encouraging the dumping of the bonds in question and asking how a ban could operate anyway on rating agencies registered in the UK when their counterparts in other parts of the world can continue to issue ratings.
The European Commission suggests that credit rating agencies should revise ratings for sovereign debt every six months rather than annually. Any new rating should be published before the opening of European money markets and the countries in question should receive at least a day's warning of the upgrade or downgrade. In order to ensure better transparency, justification for the change in rating should be set out in a public report.
Barnier also backtracked on his idea about breathing more competition into the ratings market, dominated by the Big Three (Standard and Poor's and Moody's of the United States, and French company Fitch). He said he had wanted an agency with more than 20% of the market in Europe to be banned from buying up any other agencies, but more time was needed to get this idea accepted.
S&P. Recent events have backed the commissioner's arguments and Barnier said the serious incident at Standard and Poor's the week before, when the agency circulated a message to some clients warning of a potential downgrading of France's sovereign debt, had increased the yield on French bonds because investors feared that the country would not be able to meet its budget targets due to fallout from the Italian political crisis (the French economy has invested highly in Italy). Barnier said that the message had been sent out in error by S&P to customers signed up for its early warning system, and he urged all players to be more responsible. Barnier said he was working on additional proposals to curtail practices whereby some people get rating information way ahead of the country or body in question. He said this type of practice was likely to fall foul of EU insider dealing rules.
European rating agency. The Commission has decided not to suggest that a European rating agency be set up to counterbalance the Big Three because it would have to be done fast and would cost between €300 million and €500 billion to set up, a sum which is not currently available, said Barnier. A publicly funded rating agency would be suspected of bias, he added, saying that it was better to introduce strict rules covering all agencies although the rest of the market (outside Europe) would carry on regardless. He said he wanted tighter rules for everyone, along with more transparency and compulsory rotation of rating agencies.
The commissioner spelled out the rationale for the new EU rules, explaining that rating agencies had become bloated and he aimed to reduce reliance on their assessments by removing reference to credit rating from EU rules (like the MiFID II, UCITS and AIFM directives). In order to increase diversity, Barnier said he was changing the rules so that shareholders holding more than 5% of a rating agency's shares would not be allowed to own more than 5% of the shares of any other rating agency. A European rating index (EURIX) will be introduced, which will increase the comparability of ratings and allow small rating agencies to increase their visibility, added Barnier. (MB/transl.fl)