There's a scent of blood as credit agencies come under fire
AS the recession bites, finger pointing has almost become a blood sport. Laying the blame for the world's economic gloom has nearly become an obsession for some.
And as the focus on Ireland's prized AAA sovereign rating grows, the agencies are being targeted in relation to their contribution to the downturn.
Some feel they should have shouted stop sooner, particularly in relation to company ratings.
At a conference towards the end of last year, one speaker, to cheers of applause, said he had received a news flash: "Moody's has downgraded Fitch, Fitch has cut Moody's in retaliation, and Standard & Poor's has put itself on negative watch."
Warpath
It's not just the market watchers that smell blood. Financial regulators are on the warpath too.
Although, when proposals were put forward for regulating credit-rating agencies, complaints were made that this was a "kneejerk" reaction. The Association of Corporate Treasurers said it was "concerned the political imperative to be seen to be doing something has triggered an over-reaction that will have unwelcome knock-on effects".
Still, EU Internal Market Commissioner Charlie McCreevy, a long-time proponent of the free market, has said that credit-rating agencies must be registered to operate in the 27-nation EU and undergo day-to-day supervision and regular inspections.
He has blamed the agencies for failing to "sniff out the rot" in securitised products such as those backed by subprime mortgages in the US that crashed in value amid home loan defaults despite being highly rated.
Under the terms of his plan, registration and supervision would be done jointly by national regulators and the Committee of European Securities Regulators (CESR), a forum for all national regulators in the EU.
While the European Parliament and the EU states have the final say, Jean-Paul Gauzes, the French centre-right lawmaker steering the bill through parliament, wants key changes.
"CESR will do everything," he recently told Reuters in an interview. "I think the crisis has shown there is a need for European supervision," he said.
He added that the role of national authorities as outlined by Mr McCreevy would be scrapped.
The move is likely to prove controversial with some EU states who may fear a loss of influence over the rating agencies.
Mr Gauzes also wants to ease the so-called "extraterritorial" impact of Mr McCreevy's plans that have raised concerns in the US. He said the bill would also make it easier for investors in Europe to use ratings of products rated outside the EU.
Worldwide
Leaders of the G20 group of nations agreed in Washington last November to push ahead with tougher rules for agencies.
The agencies complain that the EU's approach compared with that of the US could cause problems in the future and ignores the need for a global approach to a global sector.
While the recent worldwide crisis has crystallised the problems, history tells a similar story.
When news that the US giant Enron was collapsing back in 2001, its rating remained at investment grade four days before the company went bankrupt, despite the fact that rating agencies had been aware of the company's problems for months.
One suggestion that followed was that rather than rely on credit-rating agencies in financial regulation, regulators should instead require banks, brokers, dealers and insurance firms, among others, to use credit spreads when calculating the risk in their portfolio.
Rating agencies have also been criticised for having too close a relationship with company management -- they meet frequently with the management of firms.
In addition, because bigger agencies charge debt issuers, rather than investors, for their ratings, some are also plagued with accusations of conflicts of interest. For the agencies' part, though, some claim to be tackling the issues. For example, Moody's and S&P have both built stronger walls between their analysts and sales people and have made other changes.
Suggestions
One of the key suggestions of reform, though, would be an end to regulatory dependence on ratings whereby investors would draw their own conclusions from expert opinion and market data, just like they do with shares.
Still, as the housekeeping continues at the agencies, all eyes will be on S&P, which is reviewing its rating of Ireland Inc's status, especially following on from moves by the Government to target public spending and as talks on recapitalisation of Allied Irish Banks and Bank of Ireland continue.
- Ailish O'Hora
