This week alone has seen a ratings downgrade for Spain as well as a threat by agencies to review France's AAA status -- and the markets have taken notice. Once again, it would seem, ratings agencies are making things difficult for European countries.
Now, the European Union is considering doing something about it.
European Internal Market Commissioner Michel Barnier is considering a move to ban the agencies from publishing outlook reports on EU countries entangled in a crisis, according to a report in Thursday's issue of the Financial Times Deutschland newspaper.
In an internal draft of a reform to an EU law applying to ratings agencies obtained by the paper, Barnier proposes providing the new EU securities authority, the European Securities and Markets Authority (ESMA), with the right to "temporarily prohibit" the publication of forecasts of a country's liquidity.
The European Commission is particularly concerned about countries that are negotiating financial aid -- for example from the euro rescue backstop fund, the European Financial Stability Facility (EFSF), or the International Monetary Fund (IMF). A ban could prevent a rating from coming at an "inopportune moment" and having "negative consequences for the financial stability of a country and a possible destabilizing effect on the global economy," the draft states.
Rules Could Be Implemented by 2012
Barnier is convinced that the ratings agencies don't always correctly assess the situation at such moments and is thus calling for the possibility of a ban on the assessments. His view is shared by many politicians and economists, who believe that the ratings agencies falsely assessed the economic situation in some countries and further exacerbated the crisis with their forecasts, causing frequent unrest on the markets.
Currently, Greece, Ireland and Portugal are receiving EU and IMF money. But many economists are speculating that, in the mid-term, further countries, possibly including Spain and Italy, could require aid.
Under the proposal, the ban could only be applied if a country were currently negotiating for aid and other strict criteria were also fulfilled. For example, the assessment would have to pose a threat to other countries or the EU financial system as a whole. EMSA would also be required to agree on the measures with other regulators.
Barnier plans to present the paper by November at the latest, and further amendments are possible. Given that it must be approved by the European Parliament and the member states, it is unlikely it could be applied before autumn of 2012.
The internal market commissioner appears to be taking a tough stance against the agencies. He is also pushing the 27 EU member states to take steps to ensure that investors can pursue civil action against agencies for "deficient ratings." He is also calling for addition ratings requirements for complexly structured financial products and steps that would create greater competition among ratings agencies.