Europe hits back against rating agencies

 

Europe issued a full-throated assault on credit ratings agencies today, saying there were signs of bias against the European Union after Moody's downgraded Portugal's debt to "junk" status.

European Commission president Jose Manuel Barroso said Moody's decision to lower Portugal by two notches and maintain a negative outlook was fuelling speculation in financial markets. Europe was looking at getting away from its reliance on the mainly US-based ratings companies, he added.

"Yesterday's decisions by one rating agency do not provide more clarity. They rather add another speculative element to the situation," Mr Barroso told reporters, adding that the agencies were not immune to "mistakes and exaggerations".

"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," he said, stating publicly a view that many senior EU officials have pushed privately for some time.

It is not the first time during the sovereign debt crisis that the EU has taken the major agencies - Moody's, Standard & Poor's and Fitch - to task, but the message this time was delivered with a much greater sense of frustration.

Mr Barroso's comments followed German chancellor Angela Merkel's brushing aside yesterday of a warning from S&P, the largest agency, that it would view the current French plan for a partial rollover of maturing Greek debt as a default.

Such a move would narrow the options available to EU leaders to tackle the crisis and could greatly exacerbate the situation.

Mrs Merkel suggested the EU had depended for too long on the opinion of outside, private-sector agencies and said Europe had its own institutions that it needed to put its trust in.

"It is important that the troika (EU, IMF and European Central Bank) do not allow their ability to make judgments to be taken away," she said. "I trust above all the judgment of these three institutions."

Last year, the EU introduced rules that require the agencies to spell out how they come to rating decisions, such as a downgrade of Portugal. Barroso said further steps were in the works and would be outlined by the end of this year.

"We plan measures to improve methodology and transparency of rating of sovereign debt, to reduce excessive reliance by financial institutions on credit rating, to further reduce conflicts of interest and introduce more competition," he said.

"We are for instance looking at civil liability by the agencies," he said.

EU officials have frequently criticised the ratings agencies for being American, although in fact only Moody's and S&P are US-based - Fitch has headquarters in both London and New York and is majority owned by a firm based in Paris.

There are moves afoot to have a Europe-based agency, although Mr Barroso said no decision had been taken.

"I know that there are some possible developments regarding the possible creation of rating agencies originating in Europe," he said, without elaborating.

Before new laws are introduced, and policymakers don't expect them to be in place until the middle of next year at the earliest, there is little the European Commission or other parties can do to influence the agencies' decisions.

A pan-EU markets watchdog based in Paris has the power, however, to intervene if it sees failings in their work. It could withdraw their license to issue ratings, although such a drastic step is unlikely.

Representatives of Greece's major creditor banks met in Paris under the aegis of the International Institute of Finance (IIF), a banking lobby, to discuss a proposed rollover of privately held Greek debt but there was no sign of agreement.

Banking sources said numerous issues involving credit ratings, interest rates, maturities and accounting consequences remained to be ironed out among multiple stakeholders and an agreement was only likely in September.

Rating agencies have warned they would be likely to treat any "voluntary" rollover of Greek bonds as a distressed debt exchange and declare it, at least temporarily, to be a selective default.

French banks have offered a plan under which banks would roll over about half of Greek debt that matures in 2011-14, putting another 20 per cent into a "guarantee fund" of zero-coupon AAA bonds, and cashing out the remaining 30 percent.

German deputy finance minister Joerg Asmussen put Berlin's alternative proposal for a debt swap extending existing bonds' maturities by seven years back on the table today, even though the European Central Bank has warned against it.

Mr Asmussen also told Reuters Insider TV it was "absolutely premature" to discuss a second rescue package for Portugal and Berlin was confident the country could implement its reforms and get back on track.

"There is a new government in place so I would really suggest giving the government the time to do what the new government has promised," he said.

"We are confident they are willing and able to implement the first package and get back on track," he said.

Under assault from several corners of Europe, ratings agencies have begun to push back against the criticism.

The head of Standard & Poor's in Germany rejected criticism that the ratings agency was being too tough in judging efforts to involve the private sector in Greece's bailout without triggering a sovereign debt default.

"The assertions are completely made up out of thin air and factually wrong. The are either based on ignorance of the facts or are politically motivated comments (that) neglect the facts," Torsten Hinrichs told Austrian radio in an interview aired today.

Asked why S&P had not waited for the final details of a French plan to let investors roll over Greek debt before warning it could trigger a default, Mr Hinrichs said the agency "did not reject the plan per se, but rather commented on how Standard & Poor's would react from today's perspective and from the information that is currently available".

"It is a purely hypothetical comment because as you correctly say the final plan has not yet been adopted."

Reuters