MEPs push for independent sovereign ratings
By Sarah Collins | Wednesday 20 June 2012
Members of the European Parliament’s Committee on Economic and Monetary Affairs (ECON), led by Italian Socialist Leonardo Domenici, have voted to curb the hold that ratings agencies, such as Moody’s, Standard & Poor’s and Fitch, have over European governments. Passed by 37 votes to five (with four abstensions) on 19 June, the Domenici report calls on the European Commission to perform sovereign ratings on its own member states. “We want to keep the door open to the prospect of us having a European authority on this,” said Domenici, on 20 June.
The report includes an addition to Article 39 in the Commission’s original regulation, first published on 15 November last year, which asks the EU to “internally assess the creditworthiness of European Union member states”. “The debt crisis in the eurozone has shown that credit rating agencies have gained too much influence, to the point of being able to influence the political agenda,” Domenici said. “Credit rating agencies should provide an information service to investors and consumers. We don’t expect them to give political opinions,” he added.
MEPs also voted through amendments to regulate when sovereign ratings are reviewed or released (two or three times per year), remove the requirement for banks to obtain external ratings under EU regulations - including for hedge funds and UCITS managers, as well as the European Central Bank - and introduce a new ratings system based on percentages or probability of default to complement the letter-based system now in place. Agencies will also be liable in civil law for any mistakes they make, banned from rating entities that own more than 2% of its capital or voting rights and forbidden from merging with agencies that hold more than 20% of the European market. The European Central Bank accepts credit ratings from only four agencies when assessing the creditworthiness of banks’ collateral - Moody’s, Standard & Poor’s, Fitch and DBRS - but MEPs have asked for the list to be expanded to include at least the 16 agencies registered by the EU’s markets watchdog, the European Securities and Markets Authority (ESMA).
MEPs stopped short of issuing a blanket ban on sovereign ratings, a controversial proposal that Internal Market Commissioner Michel Barnier had failed to get through the College of Commissioners last year. They also limited the rotation rule - where banks, under Barnier’s proposal, would have to switch the agencies they use every three to six years - to specific structured financial products, a position that mirrors that taken by the Council, on 21 May.
British MEP Ashley Fox, shadow rapporteur for the European Conservatives and Reformists group, welcomed the fact that a ban on sovereign ratings did not make it through the vote but said the rest of the regulation was “messy, misdirected and meddlesome”. “You don’t get better weather by turning off the forecast,” he said. The Greens’ finance spokesperson Sven Giegold (Germany) said the changes still fail to end the dominance of the big three agencies. “While we welcome provisions to make financial markets less reliant on ratings agencies, we regret the failure to take stronger measures to address conflicts of interest in the agencies,” he said.
Ratings agencies have come under the spotlight during the financial crisis for multiple downgrades of weaker states, often pushing up their borrowing costs. In March, the ESMA said that Fitch, Moody’s and Standard & Poor’s - which between them issue 95% of the total ratings in the EU - were not properly documenting their ratings decisions and could be at risk of making errors because of the high volume of information they handle.
The ECON vote had been delayed from 7 June, with differences emerging between Socialist and EPP deputies on setting up a European rating agency, rotation and how government debt should be rated. The ECON vote allows MEPs to go into talks with the Council on the text, which they want to agree in first reading. A deal is expected to be finalised under the Cypriot Presidency by September, when Parliament will hold a plenary vote.
Agencies were first regulated in 2009 under Regulation EC/1060/2009, which forced agencies to register in a member state in order to operate across the EU. It also required agencies to rotate their analysts, disclose their ratings and methodologies to the public and pay supervisory fees to national regulators.
In 2010, the Commission published a draft regulation (EU/513/2011) giving the European Securities and Markets Authority full responsibility for the registration and supervision of credit rating agencies - the first EU watchdog to get direct supervisory control over individual companies. Under the regulation, which came into force last year, the Paris-based ESMA can conduct on-site inspections in agencies, suspend certain ratings, ban agencies from operating within the bloc and levy fines on agencies that breach the rules.
In 2011, the Commission published a third draft regulation - COM(2011)747 - and a directive - COM(2011)746, which amends specific directives on the use of ratings by UCITS and hedge fund managers - to reduce agencies’ power. It asks banks and companies to rotate the agencies they use and do their own in-house credit checks.