Rating agencies

Europe is now deep in its own crisis, but there is still the feeling here that the world's financial woes all began in America.

The US, and to a lesser extent Britain, are viewed as lands of harsh, uncontrolled capitalism, places where some make millions speculating on stock markets while others beg in the streets. Such radical market economies are viewed with suspicion by many in Europe.

"There is a lot of criticism against rating agencies," said Phillipe Dessertine, economist at Paris' Institute of High Finance. "Probably mainly because they are in an Anglo-Saxon world and they are identified as American."

The agencies decide how good a company or country's credit is. Greek debt problems and the fate of the euro itself took a turn for the worse after the rating agency Standard and Poor's downgraded Greek government bonds to junk status last week. Spain and Portugal were also downgraded, although not as sharply.

The world's three main rating agencies – Standard and Poor's, Moodys and Fitch – are all headquartered in New York and London.

This week, European politicians railed against them, questioning their power, motives and timing in bringing an entire country to its knees.

Mounting criticism from European leaders

"The crisis has also once again brought the role of credit agencies to the fore," EU commission chief Jose Manuel Barroso said, accusing the credit rating agencies for disregarding massive European support when calculating Greece's financial health.

He said the agencies often let the dark mood in financial markets cloud their judgement.

"These agencies play a pivotal role in the functioning of financial markets. But ratings appear to be too cyclical, too reliant on the general market mood rather than on fundamentals."

In a joint letter, German chancellor Angela Merkel and French president Nicolas Sarkozy on Thursday demanded a review of how agencies evaluate government debt and publicize their decisions.

"It is necessary to reinforce the regulation of financial markets. Market reactions during the last few days have amplified the crisis," Merkel and Sarkozy wrote to EU President Herman Van Rompuy and Jose Manuel Barroso, head of the European Commission.

Merkel earlier this week said a European rating agency "could be useful" in wake of the Greek debt crisis, along with "possible changes" to the European Union's stability and growth pact for euro currency partners.

Where were the agencies ahead of the Lehman collapse?

Many critics are going even further, pointing out that both Lehman brothers and reinsurer AIG were given credit worthy status just before they went bankrupt at the very beginning of the international credit crunch.

At Thursday's emergency meeting of the European Central Bank, ECB chief Jean-Claude Trichet voiced cautious support for more competition among international ratings agencies as a possible way of countering their overwhelming influence on market fluctuation.

"I would say that in this domain as in many others the more you have competition perhaps the better," Trichet said.

The European Commission has already proposed new transparency rules for rating agencies, and Barroso has called for them to be brought under the direct supervision of a planned EU market governance body to limit the power of ratings agencies, especially when it comes to the debts of a sovereign nation.

Author: Eleanor Beardsley (ai)
Editor: Rob Turner