Credit rating agencies get downgrade from MEPs and experts

Amidst the backdrop of another round of downgrades from credit rating agencies, MEPs and experts convened to discuss how to reduce the reliance of credit rating agencies, improve transparency and discuss the rotation proposal suggested by the European Commission, during an Economic and Monetary Affairs Committee public hearing chaired by Pablo Zalba Bidegain (EPP, ES) on Tuesday.

Alternative to Big  3

The European Commission is proposing a 'rotation' system, whereby companies are forced to rotate their use of credit rating agencies (CRAs). Nicknamed the 'Big 3,' American credit scoring agencies Standard and Poor's, Moody's Investor Services and Fitch Ratings account for approximately 95% of the world market. MEPs and experts discussed the possible outcomes of a breakup of the monopoly to diversify the market.

Jean-Paul Gauzès (EPP, FR) said that such a rotation measure "is not going to increase competition".

Susan Launi, Senior European Counsel at Fitch Ratings, supported his view adding that rotation would foster "less competition, less transparency and more reliance on credit rating agencies."

"To meet demands of the proposed rotation, issuers will most probably use two CRAs at a time," she said, which would result in a duopoly.

Timing

Wolf Klinz (ALDE, DE) observed that agencies publish their ratings at inopportune times. "A week before meetings we see new ratings come out," he said. "We know how bad the situation is and along comes another rating downgrade."

Negative rating issues could cause politicians "to impose new regulations to push CRAs to publish information their public would like", warned Ivo Strejček (ECR, CZ).

CRAs morph into regulators

CRAs are acting "almost like regulators" in that they determine market conditions and "then they make profit" out of it, said Miguel Portas (GUE/NGL, PT).

Thierry Philipponnat, General Secretary at Finance Watch, shared Portas´ opinion noting that CRAs have a quasi regulatory function.

Rapporteur Leonardo Domenici (S&D, IT) said that Parliament should focus on sovereign debt, and boosting competition, whilst leaving the door open to setting up a European regulatory agency for credit rating agencies.

Next steps

The report will be discussed again on 28th February.