By Desmond Hinton-Beales - 15th November 2011
The power of the markets versus political power is a real debate
Michel Barnier
European internal market and services commissioner Michel Barnier has said that credit ratings agencies (CRAs) have "too great" a role in the EU's economy.
Barnier stressed that the agencies "do work well" and insisted that he was "not shooting the messenger".
"The power of the markets versus political power is a real debate, and we must rebuild political sovereignty so we are not at the mercy of the markets."
He added, "We want CRAs to work well. The proposals will strengthen credibility, but we must reduce dependency on ratings.
Barnier also said that the college of commissioners had agreed on the need for stricter regulation on sovereign debt ratings.
The French commissioner said that sovereign debt checks should be performed "every six months" as this will provide "a higher quality of rating and increase transparency".
He added that national governments would be afforded 24 hours notice before the publication of any ratings and CRAs would be "obliged to publish the entirety of their report".
Barnier also announced that more time would be taken to look at the technical aspects of a procedure for the "temporary suspension of a sovereign debt rating".
This would be put in place, said the commissioner, to avoid the "last minute ratings drops" with no explanation that he said worsen the situation
To improve transparency, the commission is also proposing an index which will show all the ratings of a product, which Barnier said would also "enhance the role of smaller agencies".
Infringement from CRAs will be referred to the court, allowing them the agencies to be sued if they do not follow the commission's new rules.
Parliament reaction
Parliament's rapporteur on the future regulation of CRAs, ALDE deputy Wolf Klinz said, "CRAs cannot be blamed for everything. However, there is a need for immediate action due to key weaknesses in the system.
"The current case of France shows how dependent markets are on external credit ratings. We will have to carefully assess if the commission's proposal credibly addresses this problem."
Standard and Poor's accidentally released a message to its company subscribers on Thursday last week, announcing that France's AAA status had been downgraded, spooking investors and causing market unrest.
Earlier, European parliament S&D group leader Martin Schulz had called for an ambitious CRA reform, saying that he wanted an independent European agency to counter the dominance of Fitch, Standard and Poor's and Moody's.
"I am in favour of an independent rating agency whose financing is not dependent on the economic interests of those requesting the rating," said Schulz.
However, he said the commission did not take on-board parliament's request to conduct an impact assessment on the establishment of an independent European credit rating foundation.
Sony Kapoor, managing director of the economic think-tank Re-Define, said, "The proposal makes some useful suggestions on additional disclosure and oversight but it has failed in the urgent need to promote competition and reduce reliance on ratings.
"The best measure to improve the functioning of the ratings market is to minimise the role they play in financial regulations. On this, the EU has done far too little."
