The written and oral evidence from the House of Lords inquiry into rating agencies is a veritable goldmine of information. Including the nitty gritty of how rating changes are made and disseminated.
On that note, we already know both the European Commission and the European Central Bank want to widen the current timeframe for ‘informing’ countries of a ratings change to three days. Under current rules they’re required to provide all issuers (sovereign and corporate) with 12 hours’ notice.
Here’s Frederic Devon from Moody’s with a response to the proposal:
[as for] the idea of giving sovereigns three days to comment, review and react to a potential rating action. Within the European Union, the regulations now impose a 12-hour rule, which means that from the time when we come to a conclusion and have disclosed to the issuer a potential rating action, we will have to give them 12 hours before we publish the rating action. Those 12 hours are useful for the issuer in reviewing factual elements or ensuring that we are not inadvertently releasing confidential information. Increasing that to three days creates a number of concerns. It increases the risk that, within the chain of people who have access to that information, inside information could be leaked and traded upon. Three days is a long time. There is a risk that it creates a possibility for issuers to try to influence the rating agency. If you consider the role and significance of the sovereign, if that influence was exercised it would be potentially illegal and would affect how the markets perceived the value added of ratings, and therefore would not be a good regulatory initiative in improving how rating are being perceived by the market. We have quite grave concerns about the European Commission’s proposal to expand this rule around providing access to specific information to an issuer from 12 hours to three days before we publish a rating to the market.
And here’s Paul Taylor from Fitch saying similar stuff:
I certainly agree that the three-day window potentially opens up a very large problem of information being out in the market on a non-public basis. Experience shows us that information with respect to sovereign rating changes is more likely to be shared among interested parties. For example, euro area governments sometimes seem keen to discuss these actions with each other. You inform the Greeks of a rating decision and you get phoned up by the French. That is quite disturbing in some ways. It ties in a little bit with what we were talking about earlier—the idea of a European credit rating agency and the suggestion that we are all too American. This idea of control on us, and therefore on the markets, is a little unnerving. Having said all that, the changes being proposed do not stop us doing what we do. They put some limitation in place. We are not completely against any of these changes. I do not think they are particularly good changes and they have not been thought through fully, but we could live with them.
Do countries attempt to influence rating agencies in a 12-hour window? We know that Greece had some impact in the recent Fitch downgrade. “The issuer appealed and provided additional information to Fitch that resulted in a rating action which is different to the original rating committee outcome with respect to the rating,” as Fitch put it back in May. Presumably that translated into a less severe cut.
But providing additional information can be quite different to attempting to influence.
On that note, scroll down about 90 pages in the evidence to find the words of Barbara Ridpath, chief executive of the International Centre for Financial Regulation, and who used to work at S&P:
I probably should not do this but I am going to relate an anecdote from early in my career which has the virtue both of being true and of proving your case … At one point during the Latin American debt crisis we lowered the rating of a sovereign to what was called speculative grade, double-B, but then they started to do better. So we talked to them about raising the rating and they said, “Oh no, please don’t because we are buying this debt back at incredibly low prices and we are helping this country so much, please keep the rating as low as humanly possible”. We raised the rating because the right answer was they were doing better. They were furious—they were as furious to have their rating raised as many countries are to have it lowered, because they had been doing a debt buy-back scheme at 75 pence on the pound. They thought it was brilliant.
Well, you don’t see that happen much in Europe now days. Not yet anyway!
Related links:
Breaking! Ten-yer old news from Argentina - FT Alphaville
Rating agencies in a bind as pressures mount - Gillian Tett, FT