Ratings agency hits out at plan for regulation

Commission wants advance notice for ratings but Moody’s says proposal would harm integrity.

The European Commission is to begin analysing responses to its consultation on tighter regulation of credit-rating agencies, in the face of initial hostile responses from one of the agencies.

Credit-rating agencies were widely blamed for failing to identify risks in the build-up to the financial crisis in 2008. Even after two rounds of regulation since then, the Commission still believes that financial institutions and investors are relying too heavily on the ratings.

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This, the Commission argues, leads to unjustified volatility in financial markets and instability in the whole system.

One of the big three agencies, Moody’s, this week reacted vigorously against the Commission’s thinking, particularly the concept of requiring agencies to give governments advance drafts when ratings of sovereign debt are to be issued.

Michel Barnier, the European commissioner for the internal market, has suggested at least three days’ notice should be given before publication.

Commission officials believe that by obliging agencies to give advance notice of rating decisions, countries will be able to highlight factual errors, and investors’ reactions will be more conservative.

Concerns

On Monday, Moody’s argued against compromising the integrity of the rating process, particularly since countries might place pressure on agencies to alter their draft assessment.

“As with other ratings, sovereign ratings are treated with high analytical integrity and the utmost discipline related to transparency, impartiality and disclosure,” a document from Moody’s stated.

“To maintain this independent reference point, the global investor community must have confidence that there is no undue influence by sovereigns on their credit ratings”, the agency insisted.

Michel Madelain, the president of Moody’s Investors Service, said: “The adoption of measures that could be perceived as creating a bias in EU sovereign ratings would taint the quality and credibility of ratings issued in the EU.”

Potential conflict

Standard and Poor’s and Fitch, the other two large rating agencies, have not published their responses to the consultation. The Commission is expected to announce proposals by the summer.

The latest rules applicable to the credit-rating sector came into force on 7 December. They sought to minimise potential for conflicts of interest and to ensure higher-quality ratings and greater transparency of the rating process.