Saturday, September 6, 2008

Credit Rating agencies look for credit in the EU

Brussels, July 14 - The European Union is set to take off the credit cloak of credit agencies with a mandatory registration procedure and dress them in a code to be monitored by a pan-European watchdog, according to conclusion reached by the EU finance ministers in Brussels. “There is an agreement on rating agencies,” French Finance Minister Christine Lagarde, whose country holds the EU rotating presidency, told journalists after chairing a meeting with her EU counterparts. “There is an agreement in principle on registering rating agencies and there is an agreement on monitoring credit rating agencies,” she added.

The announcement was music to the ears of EU Internal Market Commissioner Charlie McCreevy, who has been an ardent advocate of such measures much on the lines practiced in the US where credit ratings agencies have to register with the Securities and Exchange Commission (SEC.)

He has been quoted as saying that a voluntary code for agencies is a “toothless wonder” that failed to “sniff out the rot” in the US mortgage-backed structured products that lost all the shine even with high credit ratings intact. With the Commissioner set to launch proposals later this year and the European ministers already giving the go-ahead, there was another factor represented by the European Parliament, the only-directly elected European institution, which, through one of the members gave an encouraging input last month.

MEP Pervenche Beres of France, chairwoman of the Parliament’s Economics Committee, endorsed the idea, saying that credit agencies should have to register as they do in the United States and come under accountable financial supervision. Beres was quoted in a media report as saying: “The best solution would be that the Committee of European Securities Regulators (CESR,) made up of national market watchdogs from the 27 EU states, is the place where the rating agencies should be registered. “Supervision should be under CESR. If you have national supervisors doing their own supervision without doing any coordinated approach, you will be creating a non-level playing field,” Beres added.

Controversy was kick started last year when a crisis in the US market for poorlysecured mortgages pushed global financial institutions, including banks and building societies, to the verge of collapse. The accusing finger pointed to credit agencies like Standard & Poor’s, Moody’s, and Fitch who failed to warn of such disasters even though their credibility depends on analysing and churning out creditworthiness reports of countries represented by their respective governments and financial institutions.

With the EU ministers agreeing to give a go-head, McCreevy said that the European Commission would make a legal proposal in October on how to deal with rating agencies in the future. “We have now come to the conclusion that a regulatory response is necessary,” he concluded.

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