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| Michel Barnier said ratings had a direct impact on the prosperity of European citizens |
The
European Commission has put forward stricter rules for the credit rating
agencies that rank countries' and companies' debt.
It says the
agencies, including Standard & Poor's, Moody's and Fitch, should follow
stricter rules, be more transparent about their ratings and be held accountable
for their mistakes.
Agencies'
reports help investors to judge borrowers' creditworthiness.
Downgrades
from them can provoke higher interest rates for weaker borrowers.
The EC
internal market commissioner, Michel Barnier, said the agencies, which are
privately owned by investors, had a serious and widespread effect on
individuals.
"Ratings
have a direct impact on the markets and the wider economy and thus on the
prosperity of European citizens," he said. "They are not just simple
opinions."
He also
said they were not infallible in their assessments and had made "serious
mistakes" in the past.
Standard
& Poor's last week accidentally issued a notice it had downgraded France's
rating - a move that had been rumoured for some time, but which was a mistake
blamed by Standard & Poor's on a technical error.
Many blame
the agencies for triggering the financial crisis, which began in 2008 after
they gave top grades to complicated packaged debt which included sub-prime
mortgages.
'Disruptive'
Downgrades
of a country's credit ratings over the course of the eurozone crisis has led to
huge changes in borrowing costs for some countries, including Greece, the Irish
Republic and Portugal.
Mr Barnier
said some of these credit rating changes had been highly disruptive: "I
have also been surprised by the timings of some sovereign ratings - for
example, ratings announced in the middle of negotiations on an international
aid programme for a country.
"We
can't let ratings increase market volatility further."
He said any
agency that "infringes, intentionally or with gross negligence, the CRA
[Credit Rating Agency] regulation, thereby causing damage to an investor having
relied on the rating", should have the case taken to the courts.
He said one
of the Commission's aims was to reduce the over-reliance on ratings, while at
the same time improving the quality of the rating process.
'Stricter
rules'
At present,
a country or company that wants to borrow money by issuing a bond, or IOU, will
pay a credit rating agency to rank it, with AAA being the top rating given, and
"junk" the lowest.
A low
rating means lenders will want a higher interest payment from the borrower to
make up for the risk of default.
"Credit
rating agencies should follow stricter rules, be more transparent about their
ratings and be held accountable for their mistakes. I also want to see
increased competition in this sector," said Mr Barnier.
This would
include introducing a general obligation for investors to do their own
assessment.
He called
for agencies to communicate their ratings to the European Securities and
Markets Authority (ESMA), which would then be published, and for any changes to
a rating to be released outside of European trading hours in order to reduce
market turmoil.
The
proposals will pass to the European Parliament and the Council (member states)
for negotiation and adoption.
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