The European Parliament fails to really restrict the rating agencies

Michel Barnier, member of the European Commission responsible for Internal Market and Services speaks in the Plenary Session of the European Parliament in favour of tougher rules for credit rating agencies. (European Parliament Audiovisual Services, 16.1.2013).

Michel Barnier, member of the European Commission responsible for Internal Market and Services speaks in the Plenary Session of the European Parliament in favour of tougher rules for credit rating agencies. (European Parliament Audiovisual Services, 16.1.2013).

The European Parliament adopted yesterday tougher rules for the issuance of creditworthiness ratings on governments and private businesses by the relevant agencies. Obviously the new legislation was voted in relation with and aims to set new restrictions on the activities of the three largest of them, namely Standard & Poor’s, Moody’s and Fitch IBCA. But let’s see for ourselves, if there will be any real impact on the activities of those agencies.

Not to forget that all three are registered in the United States and are an integral part of the American and the world financial system. The idea of this new legislation is to reduce the role those three play on the management of the sovereign debt crisis in the Eurozone. Is it possible? Or the Parliamentarians just flatter themselves?

A first and quick appreciation of this European Parliament initiative is that it comes too late and allows the numerous European Union institutions to continue use the services of those three American firms until the year 2020, a very long time for such a pressing matter.

ESM/EFSF

The European Stability Mechanism which defines itself as “an important component of the comprehensive EU strategy designed to safeguard financial stability within the euro area”, posts in the first page of its Internet location, the appreciation of its creditworthiness by the Fitch agency. Along the same lines the European Financial Stability Facility (EFSF) which was created to “safeguard financial stability in Europe by providing financial assistance to euro area Member States”, praise itself about the good ratings by the three agencies.

A Press release by EFSF makes detailed references to the ratings of the three agencies, presumably because the Facility’s directors consider the three agencies as very important for the activities of EFSF/ESM, which mainly consists of convincing investors to buy their debt paper.

The press release goes like this: “the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF) take note of the decision by Moody’s to change both entities’ long-term rating from Aaa to Aa1. Moody’s decision follows the recent change of France’s long term rating from Aaa to Aa1. ESM and EFSF continue to be assigned the best possible long-term by Fitch (AAA) and the best and short-term credit rating by Fitch and Moody’s. This underlines ESM’s uniquely robust capital structure and the solidity of EFSF”.

No wonder why EFSF/ESM, the two most important financial instruments of the European Union, with a combined endowment of at least €700 billion, do not seem ready to abandon the services of the three rating agencies. Not in the foreseeable future.

In any case the European parliamentarians voted some very pertinent restrictions. Or at least this is what they believe they did. According to the Parliament’s press release the new rules “will allow agencies to issue unsolicited sovereign debt ratings only on set dates, and enable private investors to sue them for negligence. Agencies’ shareholdings in rated firms will be capped, to reduce conflicts of interest. MEPs also ensured that the ratings are clearer by requiring agencies to explain the key factors underlying them. Ratings must not seek to influence state policies, and agencies themselves must not advocate any policy changes, adds the text. The rules have already been provisionally agreed with the Council”.

All those restrictions are very well conceived. The problem is however that the three agencies are based in New York and this fact presents certain practical difficulties. It is also a fact that in the United States do not exist such restrictions on the activities of the rating agencies. Actually in the US there are very few restrictions on the entire financial sector.

As a result these new rules voted by the European Parliament and agreed with the Council, would have a very restricted, if any at all, practical impact on the activities of the European Union’s financial industry. It is inconceivable the financial markets of London, Frankfort, Paris and all over the 27 EU countries to change even slightly their attitude towards the three rating agencies.

Unfortunately the role that those agencies play for our Western financial system is so “systemic”, that the European Parliament cannot touch them. The three agencies are a constitutional part of the triangle US-Europe-Japan financial system and they feed directly the banking leviathan.

Consequently the title given to this story by the press services of the European Parliament, “Tougher credit rating rules confirmed by Parliament’s vote”, does not reflect reality. They are tougher but in order to be “rules” they must have a direct and immediate impact, which they don’t. So at the end they are not rules at all and the Parliament confirmed once more it’s rather decorative character.

 

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