EU ratings agency: The idea is so bad that it’s a wonder it is still floating around. European Commission president Jose-Manuel Barroso is openly backing calls by Germany and others for Europe to create a taxpayer-funded competitor to the likes of Moody’s, Standard & Poor’s and Fitch Ratings.
The battered credibility of the “Big Three” credit rating agencies certainly justifies serious reform to the way they operate. But the Barroso solution would amount to creating yet another discredited body.
An EU ratings agency would rightly be laughed out of the market. No matter what its modus operandi or governance, it would be tarred with the suspicion that its actual functioning will have nothing to do with protecting investors, and everything to do with politically motivated agendas. Advocates of the idea seem to have forgotten that most investors in European securities can be regarded as so-called “Anglo-Saxon” — pro free market — and simply wouldn’t trust the new body. Where the Big Three are accused of sloppiness, the new agency would be perceived as a tool for political meddling.
Thankfully the Commission is simultaneously working on more sensible policies. It wants rating agencies to be supervised by the new European Securities and Markets Authority, which could request information and investigate methodology. Structured credit issuers would have to provide all agencies with the same information they give their appointed agency. This would go beyond recently agreed rules that will soon force agencies wishing to operate in the EU to register. But there are other ideas that the EU might usefully consider. It could make it a policy to encourage new entrants to the industry. Established credit insurers like Allianz-owned Euler-Hermes, or Coface, a subsidiary of French bank Natixis, seem ready to start competing with the Big Three in corporate ratings. Structured products and sovereign debt ratings could also do with more players.
Serious and appealing reform ideas do exist. But a European ratings agency isn't one of them.
