Last week new rules on when and how credit rating agencies may rate state debts and private firms’ financial health were approved by the European Parliament.
‘Too many companies and investors have lost money for having blindly and solely relied on the mistakenly considered infallible Credit Rating Agencies. But evidence has shown that they can be extremely wrong’, said MEP Wolf Klinz, who already made proposals in June 2011 for regulation of rating agencies.
The most important new rule is that by 2020 (!) no EU legislation should directly refer to external ratings, and financial institutions must no longer be obliged to automatically sell assets in the event of a downgrade. Pension funds and even the ECB are now using ratings, which gives the agencies (too) much power on the market. The EP is therefore urging credit institutions and investment firms to develop their own rating capacities.
Another new rule, that agencies are liable and accountable for ratings, also looks good (investors who rely on a credit-rating can, in future, sue the agency that issued it for damages if it breaches the rules, intentionally or by gross negligence) but can be risky as well, according to finance experts. The danger could be that agencies, being too prudent, will publish lower ratings making the whole initiative contra-productive!
‘Unsolicited sovereign ratings could be published at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year’. Who understands this rule? Every day something can happen that influences a rating.
Conclusion: Good try, but as often with new legislation by the European Parliament, not completely well-considered…
By: N. Peter Kramer
