Commission calls for delays to ratings of sovereign debt
Proposal would give countries time to respond but agencies argue it would harm investors.
Credit-rating agencies could be asked to delay publishing their ratings of sovereign-debt issues, to allow countries to mount challenges. A European Commission consultation paper issued on 5 November suggests that when a country issues sovereign debt, it should be allowed up to three days to examine the assessments by credit-rating agencies before they are published.
European politicians blame ratings agencies for exacerbating the eurozone’s sovereign-debt crisis in the first half of 2010 by downgrading some countries’ debt. Standard & Poor’s downgraded Greek government debt to junk status in April, driving up the price that Greece had to pay to borrow funds. The Greek government said at the time that the downgrade did not reflect Greek government efforts to reduce its deficit.
Didier Reynders, the finance minister of Belgium, which holds the rotating presidency of the Council of Ministers, has suggested that ratings agencies should be fined if they produce unjustifiably negative ratings.
The Commission is floating the idea of requiring credit-rating agencies to inform the country for which they are in the process of issuing a rating “at least three working days before the publication of the rating”. This, it suggests, would give the country time to point out “any factual errors” in how the rating was calculated and “any new developments”. The paper says this delay would be justified “due to the potentially severe consequences a downgrade may have”.
Ratings agencies are against the idea. They argue that publishing ratings as soon as they are ready is part of their duty to ensure investors are trading with the most accurate information. A spokesman for Moody’s, one of three companies – along with Standard & Poor’s and Fitch – that dominate the ratings market, said: “Any protracted delay in communicating our views to the market is to the detriment of investors, who would be trading on outdated information.”
Conflicts of interests
The consultation is open until January 2011. One of the issues highlighted in the paper is the potential conflict of interest with the ‘issuer pays’ model: agencies, which are paid by companies issuing debt instruments, have been accused of providing excessively favourable ratings, especially for complex structured products such as repackaged mortgages or credit-card debts. Ratings agencies argue that all business models, including ‘investor pays’, present potential conflicts of interest.
New rules requiring agencies to register with financial regulators and adhere to rules of conduct were agreed in September 2009 and will come into effect in December. Further changes to the rules are currently being negotiated in the Council and the European Parliament to achieve higher standards of transparency, especially for structured financial instruments.
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