Following through on a strategy that slaps of the “killing the messenger” adage, European Union member nations are slated to vote this week on restrictions to U.S.-based credit ratings agencies.
EU members are widely expected to approve legislation that restricts the timetable in which any of the three—Moody's Investors Service, Standard & Poor's and Fitch Ratings—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.
The EU has admitted that’s part of the purpose is designed to “reduce the reliance of ratings agencies” and a direct response to downgrades of its member nations – which were, in fact, struggling mightily with debt loads, sometimes dangerously so.
“When nine euro zone countries were downgraded by Standard & Poor's in January 2012, it led markets to speculate on the break-up of the euro zone,” an EU statement release noted. “Agencies would need to explain the key factors underlying their ratings and refrain from making any direct or explicit recommendations on countries' policies. In addition, they would not be able to issue explicit recommendations on member states' policies.”
Many market-watchers have been wary of the move, characterizing as an extreme reaction to a situation. Ed Altman, PhD., the Max L. Heine Professor of Finance at the NYU Stern School of Business, the director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions and creator of the “Z-Score” bankruptcy predictor, called it a form of censorship. Altman, who will be speaking at the 2013 Credit Congress in Las Vegas, said the move was “an unfortunate precedent” and “totally unnecessary.”
-Brian Shappell, CBA, NACM staff writer