Credit rating agencies face investigation by the EU

CREDIT rating agencies are being investigated by the EU, as they are suspected of having conflicts of interest and timing their downgrading of euro area countries to suit some of their clients.

There are growing fears that Moody’s latest step — downgrading Portugal to junk status just as they begin to implement a major austerity programme — could lead to Ireland suffering also.

This was compounded by Standard & Poor’s warning that they would regard a French bank plan to rollover private investor debt in Greece as a default. This would threaten the latest Greek rescue and bring the country closer to default.

The rating agencies’ moves pushed up the cost of Portuguese borrowing when they raised 3-month money; yield on Spanish and Italian debt rose while bank stocks fell in Europe. Analysts warned that it was fuelling fears in the market that would have a contagion effect which was bad news for Ireland.

The European Commission’s Internal Market directorate headed up by Frenchman Michel Barnier has been investigating the agencies for some time, particularly the three US companies that have a near monopoly over rating sovereign debt.

EU officials said they were looking at possible conflicts of interest, such as who is paying them, and the timing of their announcements and warnings about downgrades.

The European Securities and Markets Authority, ESME, set up at the start of the year and independent of the commission, is responsible for their regulation and enforcing new rules.

It can challenge their methodology and question the information and remove their licence.

European Commission president Jose Manuel Barroso accused Moody’s of downgrading Portugal without having the facts of the country’s situation and “adding another speculative element to the situation”.

“Rating Agencies are market players and not immune from the market cycles of mistakes and exaggeration that comes with them as we have seen in the crisis”, he said.

Mr Barroso, who is a former Portuguese prime minister, said the RA took their decision despite the fact that the government had just announced it was going even further than the cutback agreed with the EU/IMF and with full support of its parliament.

Amadeu Altafaj Tardio, spokesperson for Economics Commissioner Olli Rehn, said “The programme has just started. . . the timing of Moody’s decision is not just questionable but based on hypothetical scenario which is not in line at all with the economic programme.”