EUROPEAN regulators have stepped back from proposing controversial reforms that would ban ratings agencies from publishing views on struggling sovereigns.
The European Commission (EC) also shelved plans for a public EU ratings agency on the grounds of cost, saying it would require some €300-€500m (£256-£527m) to set up, money not yet available from Brussels’ ballooning budget.
But Commissioner Michel Barnier promised yesterday that the delay is only to give the EU more time to flesh out the ratings ban idea.
And the EC pushed on with draft rules that will shake up the ratings industry by requiring companies to rotate their use of agency every three years.
The aim, according to the EC, is to prevent “the prevailing practice of long-term relationships” between agencies and the firms they rate, which regulators say creates a “familiarity threat” that tempers agencies’ willingness to downgrade. Regulators also suggest that agencies have a conflict of interest because they are paid by the firms they rate.
Agencies argue that the rotation rule will force standardisation in the industry as firms seek consistent ratings of their credit-worthiness, and will undermine investors’ ability to judge agencies’ performance over time.
A spokesman for Moody’s said: “Forced rotation is an experiment that will lead to a… reduced offering of opinions. It will remove incentives to improve ratings quality and long term performance.”
The EC is also trying to find ways to reduce the market’s reliance on ratings and proposed that investors and banks should have to produce their own internal ratings of investment products rather than “mechanically” using those of the three main agencies.