Euro Crises / Europe

Nil points for the Eurovision: a review of ratings agencies reform

Over recent years, EU countries were often upset about the credit ratings they received all too fre-quently. This will change now – probably not the fact that they will be upset, but more the rate of these unbridled temper tantrums of many a politicians. Rating agencies are now only allowed to pipe up thrice a year. This was the decision of the European Parliament. However, the reason for this is not only to lessen anxiety but primarily to make it easier to take to account these businesses, such as the usual suspects Moody’s, Fitch or Standard & Poor’s, for wrong ratings, be it deliberately or negligently off the mark. In other words, even rating agencies – like any other ordinary criminal – will have to pay for wrong behaviour and face its consequences in the form of damages.

The big threeWhy? Well, because they have been behaving in exactly this insensitive way for years. One may recall the outcry when Standard & Poor’s downgraded France’s credit rating about a year ago ‘with-out’ meaning to do so – they called it a ‘computer malfunction’, I call it ‘human malfunction’. This was, of course, not the only time such things happened. Even before the credit crunch triggered the financial crisis in 2008 these firms gave both businesses and individuals whitewashed assess-ments and incorrect information in order to protect their own profits. The principle of “avarice de-vours brain” may especially be true for rating agencies, but certainly this is a widespread disease amongst other firms or industries as well. Yet, this should not be an excuse for such powerful agen-cies to behave as they did and do. The internal market commissioner of the EU, Michel Barnier, expressed this quite clearly: “We all know that the rating agencies contributed heavily to the financial crisis”.

Still, only two days ago Fitch for once announced a very positive view of the future of the European Monetary Union by declaring a collapse as “very unlikely” and announcing that “the worst of Europe’s debt crisis is over”, the EU legislature wants to protect the countries concerned with the ratings and itself from the very surprises. The reorganisation is intended to fend off the risks of a destabilisation of the markets by “inappropriate assessments”, Mr Barnier said. The agencies now have to publish three release dates for their ratings each year in December. This allows Europe to be all set for the consequences.

This decision is, of course, not very popular with the major dominating three agencies (market con-centration ratio of 90%), who tried to oppose it but to no avail. Clearly, the European Parliament could have gone a bit further, for example through forcing businesses to alternate between agencies, or finally setting up an independent European rating agency. Nevertheless, Europe is stepping for-wards, although slowly.

Today, Standard & Poor’s, apparently rather moody, complained that “European regulations of rat-ing agencies are quite strict anyway”, but then affirmed, as well as Moody’s themselves, to concen-trate on sticking to the new rules.

There is a chance that one may see an improvement in the behaviour of rating agencies over the coming years. However, people don’t change, they may want to, they may need to … but they don’t. They would prefer change without changing. And that is impossible.

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