The European Union's internal market commissioner, Michel Barnier, has mooted the idea of a European credit rating agency. This follows criticism that the rating agencies have intensified the eurozone sovereign debt crisis by downgrading Greece's debt too fast.
The proposal follows new legislation to govern ratings agencies in the aftermath of the financial crisis, which will come into force in December 2010. Under new guidelines, agencies will have to register, have more stringent corporate governance measures and provide more transparent information about their methodologies.
Credit rating agencies have come under criticism, most recently for creating further turmoil in the markets with the timing of downgrades of the debt of Greece, Portugal and Spain.
In the case of Greece, critics cite the decision by Standard and Poor’s to downgrade Greek debt to ‘junk’ status despite the likelihood of an EU-IMF $140bn package. The downgrade led to a steep sell-off in the Greek, Spanish and Portuguese bond markets, adding to their borrowing costs.
Standard and Poor’s has rejected the criticism, saying that its rating of Greece has been more positive than the verdict of financial markets over the past few months.
Mr Barnier did not give details about the agency, but he noted the domination of the three players, Standard and Poor’s, Moody’s and Fitch. "We need more competition and diversity," he said.
José Manuel Barroso, European Commission president, has echoed Mr Barnier’s comments and is proposing a plan to place ratings agencies under the control of a new European securities markets authority.
"Deficiencies in their working methods have led to ratings being too cyclical, too reliant on the general market mood rather than on fundamentals – regardless of whether the market mood is too optimistic or pessimistic," said Mr Barroso.
Angela Merkel, German chancellor, and Nicolas Sarkozy, French president have also called for a re-evaluation of how the agencies determine their ratings on government debt and publish their decisions.
