Ratings agencies under attack amid debt crisis

Monday, 18 July 2011 00:00 - - {{hitsCtrl.values.hits}}

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 on Monday.

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.