Free flowing, timely and accurate information has an impact on business and credit on a level that is hard to overstate. It’s why the move by the European Union to limit when and what the so-called “Big Three” credit ratings agencies can say regarding sovereign ratings is an issue worth watching closely.
An EU council has approved draft 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.
New York University’s Ed Altman, PhD, who will be making an encore appearance at NACM’s Credit Congress in May 2013 at the behest of association members, called the EU’s move an unnecessary form of information censorship.
“I don’t know if it’s ‘dangerous,’ but it is certainly an unfortunate precedent to restrict them from giving their opinion,” Altman told NACM. “Just how much it will weaken their (ratings agencies) influence, I don’t know, but it certainly won’t help.”
Altman noted there has been a lot of pushback against ratings agencies, not just in Europe, but with the U.S. banking system looking for alternatives as well. Whether this precedent will increase the anti-ratings-agencies pushback remains to be seen. He does, however, believe the move makes issues between the agencies and the governments they rate “overblown now.”
“I think they are legitimately concerned with what they perceive as unjustified power on the part of the ratings agencies, but I think the market knows their track record and will evaluate based on their own information as well as what the ratings agencies put out,” he said. “This is all totally unnecessary.”
The three credit ratings agencies were criticized heavily for their ratings of both companies and countries, especially EU members, during the run-up to the worst global recession in more than a half a century. In addition, European leaders continued their 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 have regularly revealed deep-rooted fiscal issues. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.
Courtesy Brian Shappell, CBA, NACM staff writer