Tuesday 16 January 2018

Ratings agencies to face tougher EU rules

European Union finance ministers and central bank heads are discussing whether government debt ratings "are necessary" as well as possible fines for rating agencies at a meeting in Brussels today.

The “economic and political implications” of sovereign debt ratings mean “it is particularly important that ratings of this asset class be accurate, timely and transparent,” according to a copy of a proposal obtained by Bloomberg News to be presented by the European Commission at the meeting.

Pressure on ratings companies increased after Greece’s rating was cut to junk status in April, adding urgency to plans to bail out the debt-plagued nation.

Moody’s Investors Service yesterday cut Spain’s top credit rating to Aa1 from Aaa, citing weak economic growth prospects and “considerable deterioration” of the government’s finances.

“The timing of this is completely political,” Sony Kapoor, managing director of think-tank Re-Define Europe, said in a telephone interview. “But there is something in the issue. The problem with credit ratings is that they are self- fulfilling.”

Ministers are “ready to discuss” fines for ratings companies who mislead investors with poor quality ratings for securities, Swedish Finance Minister Anders Borg said in Brussels, while Didier Reynders, the Belgian finance minister, said “we do need a regulation on that, it’s very clear.”

Sovereign-debt rating

Rules to force rating companies to disclose the reasons for changing a sovereign-debt rating, as well as the timing of the adjustment, also were being discussed.

“Concern has been expressed on whether the ratings of sovereign debt are necessary at all given the fact that there is already a large degree of transparency in the markets as regards the situation of government finance,” according to the commission document, dated September 15.

The EU approved rules for credit-rating companies last year, requiring them to adhere to a code of conduct to reduce conflicts of interest between issuers and rating firms.

The existing regulation doesn’t address problems such as an “over-reliance on credit ratings,” the “civil liability” of agencies or “the high degree of concentration” in the market for ratings of a small number of firms, the EU document said.

Credit rating companies should have “stronger competition” and “better regulation,” Sweden’s Borg said. “But it’s not the main problem. You can’t blame the thermometer for the fact you have a fever. You can have a better thermometer.”


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