‘Bailout’ countries could have credit ratings suspended

IRELAND and the other countries getting bailout funds from the EU/IMF could have their credit ratings suspended as part of changes in regulating Credit Rating Agencies.

Michel Barnier, the European Commissioner in charge of regulation, said he believes this could be discussed since these countries’ immediate refinancing needs are covered by their EU/IMF loans.

He will ask that finance ministers debate the issue at one of their upcoming meetings and other similar questions, especially following the decision to downgrade Portugal’s rating to junk as they began to implement their programme.

Economist Sony Kapoor who heads up the Brussels-based ReDefine think-tank, was critical of the idea saying he did not see how the agencies could be stopped from issuing ratings.

“Otherwise, someone else will come up with an opinion because investors need to know what the risk is, and you need a sophisticated agency to tell investors,” he said.

Adding to the pressure for change, chair of the eurogroup, Jean-Claude Juncker, said a European credit rating company is needed that would take into account the medium-term outlook for European countries.

The Commission is in the midst of a study of what and how to change the regulations governing the Credit Rating Agencies (CRA).

They received more than 90 submissions from interested parties including governments and CRAs to their consultation process and will make proposals in the autumn.

The new rules will deal with the issues of over-reliance on the agencies and competition, given that, in reality, only three deal with sovereign debt.

The alternatives being considered include the promotion of networks of small and medium-sized agencies, strengthening the role of central banks in providing credit rating services, setting up a new independent CRA in the form of a foundation. Whatever the outcome, a primary concern is to prevent a conflict of interest.

The options to reduce over-reliance on the advice of agencies are to require banks to carry out their own credit risk management. Institutions with material credit risk could be obliged to develop and use internal ratings-based approaches for calculating their capital requirement which would then be inspected by the European Supervisory Authorities.

Improving the transparency of sovereign debt ratings, the options being considered are to include the disclosure of what staff are allocated to different asset classes, including sovereign ratings, and to require them to give a detailed explanation of the methodologies they used when arriving at a rating.

They are also looking at giving governments an opportunity to study and respond to agencies’ proposed ratings in advance, though within a short timeframe to exclude insider trading.

Another issue on the table is that of civil liability and there was quite a lot of support for the idea, though only in cases where a CRA infringed regulations and acted with gross negligence or intent.

Investors could not sue for a faulty rating.

The CRAs are required to register with the ESMA, European Securities and Markets Agency established at the start of the year, but due to various delaying factors the big three — Moody’s, Standard and Poor’s and Fitches — were not cleared by the deadline of July 1 but continue to operate under the clearance of the national regulators.

They were not regulated before the crisis and now are the only financial institutions directly overseen by a European supervisory authority.