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EU targets credit rating agencies

Michel Barnier Image copyright Reuters
Image caption 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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