What with the ECB on Greece, and Moody’s on Portugal, it’s been a week to remember the ancient adage (ahem) that “ratings don’t kill sovereigns, ratings users do.”
Predictably, the European Commission didn’t care on Wednesday:
Funny then that on Monday – before it all kicked off – the European Commission released the results of a consultation with ratings users (big hat-tip to JWG Group).
Reckon there was much support for a single European rating agency, as opposed to actual changes on how all credit ratings are used? This is the European Commission. We all know what they did to the similar debate on sovereign CDS. So what do you think respondents wanted?
From the consultation:
3.1 European Central Bank or National Central Banks
There was not significant support among stakeholders for the ECB or Member States’ National Central Banks to establish ratings. While some governments and regulators were supportive of this idea, others were sceptical of public sector involvement in the ratings sphere.
3.2 New National Entrants
A limited number of stakeholders responded in this area. Some governments, finance industry groups said that if such an option would be pursued, operational independence would be a key factor. On the other hands, some other governments, finance industry groups and CRAs were against state intervention to stimulate new entrants.
3.3 Public/Private structures
Some Member States proposed the idea of Public/private structures to be further considered and analysed. At the same time, some of these respondents further noted the problems of credibility and conflicts of interest that could be caused by direct funding arrangements and which would need to be addressed. Some national regulators and several private enterprises opposed the creation of a new European CRA.
The single rating agency is another fake promise, this time to stop Portugal going under. Just like the burden of official debt which is helping it proceed in that direction (and which European officials insist that agencies must assign AAA ratings, in between calls that the rating agencies have oh, much too much influence!). That’s all.
Anyway, the consultation results are also interesting on the actual alternative on offer here, which is for investors to do their own due diligence instead of using external ratings. There does seem to be a special problem with sovereign debt. As the document states:
There was widespread support for a requirement for firms to conduct their own due diligence without relying exclusively on ratings from respondents in several categories, including industry associations, governments and regulators and rating agencies. However, there was a small amount of concern regarding smaller firms’ abilities to perform such analysis. It was mentioned that current sectoral legislation already contains such requirements which have recently been strengthened. A range of different stakeholders, among them governments, industry associations and regulators, offered support for increased transparency including disclosure of firms‟ reliance on external ratings. There was also strong support for all information used by CRAs for rating structured finance instruments to be made available to everyone while some expressed concern about the costs of such a measure, confidentiality issues and international consistency. While there were mixed views on whether or not sovereign debt ratings were based on publically available information – some felt that private meetings were also involved, or that even if based on public information, CRAs added value, not all respondents thought this meant that all firms would have the capacity to analyse this information similarly.
It’s a collective action problem, but come on, those are hardly insurmountable, and banks have to be pushed to change their business models.
And from the banks, to the central banks.
Related links:
Portuguese covered bonds and collateral damage – FT Alphaville
Greece calls rating agency downgrades ‘madness’ – BBC News
Dodd-Frank could delay U.S. capital rules: JPMorgan – Reuters