Fear of Junk Status Europe Seeks to Free Itself from Rating Agencies' Grip
Part 2: Breaking the Power of the Big Three
Politicians, however, are more confident about their ability to break the power of the Big Three. The idea of a new European rating agency was already floated during the early stages of the euro crisis. In Germany, the proposal is supported by politicians from across the political spectrum, including Green Party co-floor leader Jürgen Trittin, former German President Horst Köhler, who belongs to Merkel's conservative Christian Democratic Union, and the former head of the business-friendly Free Democrats (FDP) and current foreign minister, Guido Westerwelle.
Politicians have repeatedly emphasized that the agency would have to be independent, but it is unclear who would guarantee this independence. The current euro crisis has shown that even the mighty European Central Bank is prepared to yield to political pressure and sacrifice its principles if necessary. Many observers argued that the ECB lost its independence when it began to buy up the bonds of debt-stricken euro-zone members on a massive scale.
Wolf Klinz, a member of the European Parliament for the FDP, believes he has found the solution. He proposes that the new European rating agency be set up as a foundation, which would grant it financial and political independence. Klinz presented the idea late last year on behalf of the European Parliament's Economic and Monetary Affairs Committee.
The European Commission, the EU's executive, now wants to respond with its own proposal in autumn. "The Commission now has to come up with the goods," says Sven Giegold, the Green Party MEP, who supports the call for a foundation-based rating agency.
The members of the European Parliament who are pushing for a European agency don't just want a fourth ratings giant in addition to the Big Three. Instead, they want to establish a Europe-wide network of credit rating agencies. In order to ensure sufficient demand for their services, the EU could stipulate that structured financial instruments need to have ratings from two agencies, rather than just one.
The question remains whether European agencies will also judge the creditworthiness of entire countries in the foreseeable future. At the moment it looks unlikely. Euler Hermes, for example, has already announced it will continue to limit its business to companies, partly because of the high liability risks involved. Similarly, plans by the French credit insurer Coface to take on the Big Three by issuing its own corporate ratings were abandoned, at least for the time being. "In Europe I don't see any potential competitors waiting in the wings," comments Brigitte Haar from Goethe University.
FDP politician Wolf Klinz believes, however, that rating agencies are only actually necessary for assessing financial products. "When it comes to national debt, we don't need the agencies," he says. After all, he argues, all the important data on a country's debt is publicly available from sources such as the OECD, the International Monetary Fund or the respective central bank. Large investors can therefore easily assess the country's financial health by themselves, he argues.
The Green Party's Sven Giegold believes that it would be easy for European countries to gain greater independence from the rating agencies. For example, the EU's insurance industry directive Solvency II could simply be suspended, he argues. "That would take all the insurance companies' capital out of this fatal system."
It also looks like the European Central Bank may soon choose to place more faith in its own opinions. Previously, the ECB has said it will not accept Greek government bonds as collateral if these are given a "default" rating by the agencies. According to a report in the Financial Times, the central bankers are now prepared to continue to accept the bonds until all three major agencies have declared a default.
Effectively, that would mean taking the least worst rating as the guideline. As long as there is no viable alternative to the Big Three, many Europeans will consider that the best approach.
- Part 1: Europe Seeks to Free Itself from Rating Agencies' Grip
- Part 2: Breaking the Power of the Big Three