Credit rating agencies have warned the European Commission that they could stop rating risky countries if the EU executive goes ahead with plans to make them legally liable for errors of judgment, industry sources said.
Tensions have been rising between Brussels officials and the three major agencies, whose assessment on countries and companies determines their cost of borrowing, after Standard & Poor’s downgraded Portugal and re-ranked Greece below Egypt.
Moody’s and Fitch have also downgraded euro zone member states in recent months, increasing investor uncertainty.
To put a check on their decisions, which can have a powerful impact on financial markets, policymakers are considering making the agencies legally liable if an assessment, such as a downgrade of Ireland or Portugal, turns out to be flawed — although it remains open how this would be proven.
The agencies, worried that the EU’s proposals could expose them to claims from thousands of sovereign bondholders, are fighting the proposal, arguing it could force them to cease publishing ratings on some countries altogether.
In a document seen by Reuters, Standard & Poor’s outlines its concerns, saying a “new liability standard could end up restricting ratings for riskier debt issuers.”
“Rating agencies are not set up to take on that kind of liability,” one industry source said late on Wednesday.
“Investors have to be allowed to take risks,” he said, adding that imposing liability could push agencies to “withdraw from ratings … in various areas”.
The row highlights the widening rift between the EU’s political leaders and financial market participants.
Leaders had hoped a new scheme to help states in financial difficulty, which comes into effect in 2013, would win over skeptical investors and bring down the cost of borrowing.
But it backfired when rating agencies said the plan actually increased the risk of losses for ordinary bondholders.
“The track record of rating agencies is very shoddy — they overrated before the crisis and now they are rating too low,” said Sony Kapoor, founder of think tank Re-Define.
“But they are at the center of the financial systems — everyone uses ratings, from the ECB to banks. This is not an easy problem for Brussels to solve.”
(Editing by Luke Baker)
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