Wednesday, September 29, 2010

EU wants to fine ratings agencies for downgrades of European countries

I like the idea: Governments can fine rating agencies for government ratings that the governments don’t like. It makes sense, but it doesn’t go far enough. Why shouldn’t governments also be able to fine newspapers for stories they don’t like?

(Reuters) - EU finance ministers will discuss this week how to penalise rating agencies for passing judgement on countries based on "wrong analysis", a senior EU politician said on Tuesday.

Didier Reynders, the finance minister of acting EU president Belgium, said the bloc's economy chiefs would discuss such a regime when they gather this week to examine controls for the agencies, whose downgrades of countries at key moments in Europe's debt crisis have angered some politicians.

Building on remarks that he wants a new EU markets watchdog to be able to fine rating agencies, Reynders said: "It must be possible to penalise. If after some weeks or months [why not after a couple of days?] it is possible to say it a downgrade was a wrong signal, what is the responsibility of the rating agency?"

"It is quite difficult to say that there is no responsibility if it is possible to prove it was a wrong analysis, a wrong signal. The penalties is the capacity to impose some responsibility on the rating agencies."

Reynders' comments illustrate growing frustration with the agencies but leave many questions unanswered about how such a penalty scheme would work or whether it would win the backing of European countries and the parliament to be introduced.

It is not clear who would decide that an agency's analysis or a particular rating change was "wrong".

Sharon Bowles, the chairwoman of the influential economic affairs committee in the European Parliament, which must give its blessing to new laws, was critical of the idea. "You cannot penalise rating agencies for getting their predictions wrong," she told Reuters.

The EU's finance ministers are acutely sensitive to the danger of further downgrades, such as one threatened on Tuesday by Standard & Poor's for Ireland as the cost of supporting Anglo Irish Bank rises.

Representatives of the three big agencies -- Standard & Poor's, Moody's and Fitch -- have been summoned to a meeting of finance ministers this Friday in Brussels to defend the way they take rating decisions.

Some in this group, including Germany's Wolfgang Schaeuble and France's Christine Lagarde, have also found it hard to forgive an S&P decision to demote Greece to junk status, as they struggled to mount a rescue, the cost of which was pushed up by the downgrade.

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