EU wants more competition among credit rating agencies

The European Commission is trying to stem the dominance of three US-based credit rating agencies and is considering new proposals aimed at loosening their stranglehold on the market.

Launching a public consultation on credit rating agencies, European Internal Market Commissioner Michel Barnier said that the EU needs to think about the role of ratings themselves and the impact they can have on markets.

Since early this year, Greece, Portugal, Ireland and Spain have been battered by ratings downgrades and subsequently higher borrowing costs, pushing government debt in those countries up even further.

The EU executive wants to end investors’ over-reliance on opinions issued by the main agencies – Standard & Poor’s, Moody’s and Fitch, which are all US-based – particularly the “cliff effect” a negative rating can have on a country’s economy.

“Sovereign debt ratings play a crucial role for the rated countries, since a downgrading has the immediate effect of making a country’s borrowing more expensive,” the Commission’s consultation paper states.

The EU also wants to look into ending the dominance of the big three firms by introducing more competition, harmonising rules on taking agencies to court and investigating how conflicts of interest – where banks, for example, pay agencies to rate their own products – can be avoided.

A new credit rating agencies regulation (EC/1060/2009) – which forces agencies wishing to operate inside the EU to register with national authorities, disclose their methodology and issue annual transparency reports – was agreed last year and will come into force next month.

Last June, the Commission drafted an amendment to the rules in order to hand supervisory power over agencies to the new European Securities and Markets Authority (ESMA) – due to open its doors next January – which could in future revoke the licenses of registered agencies not abiding by EU rules.

Separately, the Commission also launched a consultation to even out investors’ rights when buying and selling stocks, bonds, options and futures in another member state. The EU executive said that the various national rules on holding securities are “usually incompatible”, leading to legal uncertainty over who owns which stocks and bonds and making it difficult for investors to receive dividends, interest payments or exercise their voting rights.