EU Makes Move Against Ratings Agencies

The European Union, continuing to struggle with a debt crisis among many of its members, had a busy if not surprising week of action. In a move that smacked of killing-the-messenger, the EU put significant restrictions on how, what and when the three biggest ratings agencies in the world could publicly assess the sovereign credit ratings of its member nations.

The EU's head-turner came in the official form of a reprimand against the “Big Three” ratings agencies (Moody’s Investors Service, Standard & Poor’s and Fitch Ratings), all of which are based in the United States. The EU is fast-tracking legislation that restricts the timetable in which any of them could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or “malpractice” on the agencies’ part. Some call the move an attempt at improved transparency and competence, while others liken it to censorship.

The three credit ratings agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued criticism as the agencies routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain)—all of which since proved to have deep-rooted fiscal issues, mind you—and, more recently, former economic powerhouse France, which saw its prestigious “Aaa” rating downgraded a step by both S&P and Moody’s in 2012. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

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