Analysis: With Ratings Agencies on the Nose, Europe Considers the Alternatives

Ratings agencies are again under attack, with European Union leaders objecting that Standard & Poor’s, Moody’s and Fitch Ratings are an “oligopoly” that issues self-fulfilling prophecies of doom, greatly aggravating the euro zone debt crisis.

The EU’s Internal Markets Commissioner suggested a partial gag to prevent them from grading debt issued by EU economies being rescued with official funds.

There is also an undertone of critical comment that they are based in the United States.

“We must first and foremost be more demanding on ratings of sovereign debts,” the EU’s internal markets commissioner Michel Barnier said on Monday.

German Finance Minister Wolfgang Schauble said that verification was needed “to check if there is abusive behavior” by the agencies. “We need to examine the possibilities of smashing the rating agency oligopoly,” he added.

At the Organization for Economic Cooperation and Development, chief economist Pier Carlo Padoan said that the agencies do not merely pass on information but “express judgements, speeding up trends already at work.” He said: “It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis.”

Greece, Ireland and Portugal have all objected strongly to the fact and the timing of recent downgrades, and the head of the European Central Bank, Jean-Claude Trichet, said recently that the oligopoly, meaning dominant position of a handful of firms, was not an “optimal” arrangement.

There are calls from officials for the creation of a European rating agency.

Barnier blamed the agencies for “a hike in the cost of credit, weakened states” and a possible contagion of the euro zone crisis to other economies.

However, diplomatic sources say the agencies are being consulted at the EU level during tense talks on how to structure a second rescue for Greece, possibly involving a contribution from the private sector, in a way which would not trigger a default rating.

The agencies have warned that involvement of the private sector probably would trigger a default notation, and the ECB has warned that in that case it might cease financing Greek banks.

But some analysts were dismissive of Barnier’s suggestion.

“It’s a way of killing the messenger who brings bad tidings,” economist Nicolas Veron of the Bruegel think tank said.

Veron questioned whether this was the best option in Europe’s struggle to contain its sovereign debt crisis.

“What about institutional and company rating agencies in the countries concerned?” asked Cyril Regnat of France’s Natixis bank. The EU proposal, he added, risked “adding uncertainty, volatility and further speculation.”

Carol Sirou, head of Standard and Poor’s in Europe, said ratings agencies were not “hot heads” and that their work did not intend to “feed fears uselessly.

“It is not about throwing oil on fire, it’s about informing,” Sirou said.

Investors base key investment decisions on ratings, with notes going from a top grade such as AAA to D for default.

Vast numbers of investment funds, such as insurance and pension funds, may be prevented under their contracts with investors from holding sovereign debt if it falls below a given credit standing, and vice versa.