PLANS TO ban sovereign credit ratings in “exceptional circumstances” have been shelved by Europe’s top financial regulator after he came under pressure to climb down on the controversial measure to rein in the agencies that issue the assessments of national financial strength.
Michel Barnier, the European internal market commissioner, admitted that he had to bow to objections from his fellow European Union commissioners but insisted the power to suspend ratings was never “the main measure” in his reform package.
Although Mr Barnier still unveiled proposals to aggressively transform the business model and methods of the big rating agencies, the last-minute decision to order more “technical work” on suspension represents a significant political blow.
Yet, despite the amendments, rating agencies remain deeply concerned by planned requirements for issuers of financial securities and bonds to rotate agencies, and rules that give regulators the power to “pre-approve” analysis methods.
“We strongly believe that the commission proposal is damaging for the credit markets,” said Michel Madelain, Moody’s chief operating officer.
After emerging from a heated gathering of EU commissioners, Mr Barnier said that, following “a long discussion”, he had decided to postpone parts of the proposal as officials “needed more time to really go into the technical details of how such a temporary suspension could be implemented”.
The former French foreign minister was also forced to give ground on provisions restricting big rating agencies from merging – one of several rules designed to break the “cosy oligopoly” dominating the industry. Alongside the extra work on mergers and suspension powers, Mr Barnier has ordered legal experts to examine whether new rules are required to stop agencies giving some clients advanced notice of downgrade decisions. The move comes after Standard & Poor’s mistakenly signalled to a small number of customers that it was preparing to downgrade France – an error that reinforced Mr Barnier’s determination to press for an aggressive clampdown on an industry that he believes aggravated the sovereign debt crisis.
It is highly unusual for commission proposals to be revised once published and Mr Barnier would still need the support of his fellow commissioners to revive the measures. At least eight commissioners voiced concerns about suspension powers, including Catherine Ashton, the EU foreign policy chief. Under the proposals, which will require approval from EU member states and the European Parliament to become law, issuers will have to change their rating agency at least every three years – a rule that attacks the business model of the big three agencies.
One concession will permit issuers of structured products, who will be required to use two separate ratings, to retain one of the agencies for a maximum of six years. But, after rotation, agencies will sit out a four-year “cooling-off period” before they can be rehired. – (Copyright The Financial Times Limited 2011)
