CREDIT RATING agencies are set to come under renewed pressure after Germany and France called on the euro zone’s leaders to review their role in “crisis propagation”.
As fear of contagion from the Greek debt crisis roiled markets again yesterday, chancellor Angela Merkel and president Nicolas Sarkozy called on the European Commission to examine how the agencies’ power might be diluted.
A joint letter from the two leaders to commission chief José Manuel Barroso and European Council president Herman Van Rompuy also calls for a strengthening of “economic governance” in the euro area.
Calling for tighter financial regulation, they say markets have amplified the crisis in recent days “and provoked very large swings in the yields of some euro area member states’ sovereign bonds not aligned with the development of fundamentals”.
The leaders’ remarks on credit rating agencies reflect anger in EU capitals at Standard Poor’s (SP) for downgrading Greece before its EU/IMF rescue deal was concluded last Sunday. Downgrades of Spain and Portugal by SP are also perceived to be weighing on markets.
“The decision taken by a rating agency to downgrade the Greek sovereign debt before the announcement of the programme and the amount of the support package should lead us to reflect on the role of rating agencies in crisis propagation,” the leaders said.
“In the light of last week’s events, such a review should explicitly refer to the rating process for sovereign debts, to communication methods and the publication of rating changes and taking into account the possible role of credit rating agencies in amplifying the crisis and their impact on financial stability,” Mrs Merkel and Mr Sarkozy said.
“Potential actions should include stricter standards under European law. The European Commission should consider putting forward proposals to increase competition of rating activities.
“Moreover, the European Commission should critically review the justification of the use of ratings in the European laws and regulations and suggest ways to reduce their role in capital requirements.”
On economic governance, Berlin and Paris say the summit should send a clear signal that euro-zone leaders’ are prepared to consider stronger fiscal surveillance, including “more effective sanctions” for excessive deficits.
They also call for a widening of central surveillance to structural and competitiveness issues.
States should not be forced to rescue banks, the two leaders say.
“It must be possible that banks fail without causing systemic risks to the financial system. Therefore, France and Germany will push for a strict regime for crisis management and resolution in the financial sector and commit to implement it.”
