Saturday, June 5, 2010

EU-Backed Rating Company Faces ‘Uphill Struggle’ With Investors

According to the Times Online, "the big three credit ratings agencies [are being] threatened ywith fines and the creation of a new state-backed competitor, only weeks after European leaders attacked them for exacerbating Greece’s problems with downgrades..."

The agencies will be subject to a new European supervisory body with the power to hand out fines and suspensions under plans unveiled in Brussels.

Work on a rival centralised European credit agency is also being carried out by the European Commission, José Manuel Barroso, its President, said...

Mr Barroso, launching the plans yesterday, argued that the big three rating agencies — Moody’s, Standard & Poor’s and Fitch Ratings — should have done more to alert investors to the imminent demise of Lehman Brothers in 2008. “Is it normal to have only three relevant actors in such a sensitive issue where there is a great probability of conflict of interest?” he asked. “Is it normal that all of them come from the same country? Is it normal that such important entities are escaping fundamental regulation?”

Rating agencies have also come under fire in recent weeks after their downgrades of Greek and Spanish sovereign debt rocked markets and led the euro to slide against the dollar. Last month, Angela Merkel, the German Chancellor, and President Sarkozy of France demanded a review of their operations. But Mr Barroso insisted that plans for supervision and regulation were hatched long before the latest row.

Bond investors privately have cast doubt on the credibility of any new body rating sovereign debt if it is bankrolled by those same sovereign nations...

The European Commission proposed that an already-planned central European Union regulatory body — the European Security Markets Authority — should take on oversight of the existing rating agencies when it is due to begin work in January 2011.

The new authority would register rating agencies in return for a fee and check that they meet EU rules showing careful research of their rating and no conflict of interest.

The authority will be able to fine individual national offices of rating agencies that cannot or will not justify their methodology, or stop them from issuing ratings temporarily, or even permanently in the worst cases.

The proposal will now go to EU governments and the European Parliament for approval.

Mr Redwood called on the Commission to think again on its plans for supervision and a central European ratings agency. “They are going to find it extremely hard to change the way that credit rating agencies perform ... There is not a foolproof system for saying that certain assets are absolutely guaranteed in all conditions.”

Kay Swinburne, a Conservative MEP, said: “The problems in the eurozone are predominantly as a result of poor fiscal policies of some EU governments, not because of the decisions of ratings agencies to downgrade them.”

Bloomberg adds:

A government-established credit assessor may find it hard to persuade bond-buyers it isn’t shielding euro-region nations such as Spain and Portugal from scrutiny as countries struggle to cut their budget deficits, said investors including Toby Nangle at Baring Investment Services Ltd. Governments have already extended a 750 billion-euro ($913 billion) lifeline for Europe’s most indebted nations.

“A government-owned ratings agency that was rating sovereigns would have an uphill struggle in building credibility in the market,” said Nangle, who helps oversee $46 billion in assets in London...

Euro-region policy makers want to protect members with the largest budget deficits after contagion from the Greek debt crisis threatened to undermine the euro.

There was “absolutely no change” in information available for months before downgrades of countries including Spain and Portugal, showing the decisions could have been made earlier, Noyer said June 1 in Seoul. Untimely ratings actions are an “enormous problem,” he said.

The next day, Noyer told Germany’s Handelsblatt newspaper that credit insurers such as Paris-based Euler-Hermes and Puteaux could become European rating companies...

“The problem is not setting up a European rating agency,” said Laurent Bilke, a former ECB economist who now works for Nomura International Plc in London. “The problem is that it would not be followed by the investment community, particularly if they issued rating for sovereigns. For that you need strict independence from both fiscal and monetary authorities.”

Some euro-area central banks including Germany’s Bundesbank issue ratings on company bonds to use as collateral for the ECB. President Jean-Claude Trichet said May 6 that the ECB has “no position” on a European rating company, though “the more you have competition, perhaps the better.”

While policy makers have criticized markets’ dependence on ratings, ECB rules magnified their importance during the crisis. Under the terms of its money market operations, only bonds above a certain threshold are accepted as collateral. A series of Greek downgrades by two of the three main rating companies then threatened to make the country’s bonds ineligible at the ECB, which would have shaken the foundations of Greece’s entire financial system.

Goldman Sachs Chief European Economist Erik Nielsen last year described the influence indirectly given to rating agencies by ECB rules as “bizarre and ultimately untenable.”

Ratings companies already face greater EU scrutiny. The European Commission on June 2 called for a single supervisor with powers to investigate, issue fines and revoke licenses. That’s “only the first step,” Financial Services Commissioner Michel Barnier said. “We are looking at this market in more detail.”

“It is easy to think the European rating agency was going to be set up to ensure more favorable ratings, which would lead to a lack of credibility for the euro zone,” Commerzbank AG analysts Ulrich Leuchtmann and Lutz Karpowitz said in a June 2 note to investors...

“It’s too easy to blame” ratings companies, said Christoph Kind, head of asset allocation at Frankfurt Trust in Frankfurt, which manages $17 billion. “There is a saying: ‘you can’t blame the mirror for your ugly face.’ The ratings agencies are a kind of mirror of what’s happening. They just collect the facts.”

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