Breaking the oligopoly: Ratings agencies under attack amid debt crisis

EU leaders accuse agencies of issuing self-fulfilling prophecies.

PARIS:

Ratings agencies are again under attack, with EU leaders objecting that Standard & Poor’s, Moody’s and Fitch Ratings are an “oligopoly” which issues self-fulfilling prophecies of doom, greatly aggravating the eurozone debt crisis.

The EU’s Internal Markets Commissioner suggested a partial gag to prevent them from grading debt issued by EU economies being rescued with official funds. There is also an undertone of critical comment that they are based in the United States.

“We must first and foremost be more demanding on ratings of sovereign debts,” the EU’s Internal Markets Commissioner Michel Barnier said.

German Finance Minister Wolfgang Schaeuble said that verification was needed “to check if there is abusive behaviour” by the agencies.

“We need to examine the possibilities of smashing the rating agency oligopoly,” he added.

At the OECD, chief economist Pier Carlo Padoan said that the agencies do not merely pass on information but “express judgements, speeding up trends already at work.” He said: “It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis.”

Greece, Ireland and Portugal have all objected strongly to the fact and the timing of recent downgrades, and the head of the European Central Bank, Jean-Claude Trichet, said recently that the oligopoly, meaning dominant position of a handful of firms, was not an “optimal” arrangement.

There are calls from officials for the creation of a European rating agency.

Barnier blamed the agencies for “a hike in the cost of credit, weakened states” and a possible contagion of the eurozone crisis to other economies.

However, diplomatic sources say the agencies are being consulted at EU level during tense talks on how to structure a second rescue for Greece, possibly involving a contribution from the private sector, in a way which would not trigger a default rating.

The agencies have warned that involvement of the private sector probably would trigger a default notation, and the ECB has warned that in that case it might cease financing Greek banks.

But some analysts were dismissive of Barnier’s suggestion. “It’s a way of killing the messenger who brings bad tidings,” economist Nicolas Veron of the Bruegel think-tank said. Veron questioned whether this was the best option in Europe’s struggle to contain its sovereign debt crisis. “What about institutional and company rating agencies in the countries concerned?” asked Cyril Regnat of France’s Natixis bank. The EU proposal, he added, risked “adding uncertainty, volatility and further speculation”.

Carol Sirou, head of Standard and Poor’s in Europe, said ratings agencies were not “hot heads” and that their work did not intend to “feed fears uselessly. “It is not about throwing oil on fire, it’s about informing,” Sirou said.

This echoed a line taken in an interview in December by the Frenchman Marc de la Cherriere who built up a collection of small agencies and then bought US firm Fitch. “In times of crisis we look for the scapegoat,” he told Paris Match magazine in December, referring to attacks on the agencies since the financial crisis. “We prefer accusing the messenger than examining our own conscience.”

In any case, the proposals put forward by Barnier would be difficult to implement. Legally speaking, how can an economic agent, meaning someone taking decisions, be prevented from giving an opinion without censorship, Veron asked.

He noted that stopping the agencies from rating certain countries would need the approval of the 27 EU member-states and the United States, home to dozens of agencies. Freedom of speech is a constitutional bedrock in the United States.

But such a policy could give the EU some breathing room, as leaders “try to mask the fact that the larger countries will have to take out their checkbooks to save smaller countries,” Philippe Dessertine, director of the High Finance Institute at the Univerity of Paris, said.

In some ways, the risk of default disappears without ratings, said Christophe Parisot, a trader at investment firm Aurel. “Private creditors, insurers, banks won’t have to immediately provision or downgrade their assets”, he said, referring to regulatory and accounting rules governing the way assets are valued in the balance sheet.

Published in The Express Tribune, July 18^th, 2011.