Rating agencies warned to watch their step

April 29, 2010

Credit rating agencies cannot win.

They were blamed for carelessness before the crisis, handing out over-generous ratings on the packets of mortgage-backed securities that subsequently unravelled, sending the global economy into a spin and leading to Lehman Brothers collapse. Now they are being criticised again, this time for being too cautious, by dishing out rating downgrades to countries in Europe being sucked into Greece’s debt crisis.

Standard & Poor’s recently downgraded Spain’s rating one notch to AA, warning that the outlook was bleak for the euro zone’s fourth biggest economy. Struggling Greece has also been marked down — to junk status — and now hovers close to Pakistan and Venezuela in the credit stakes. Portugal is another country to be singled out for downgrades from the leading ratings companies.

It’s all little too much for the European Union, which worries about the downgrades creating a vicious spiral that exacerbates the crisis rather than helping to stall it.

Yesterday, the European Commission warned the rating agencies to watch their step.

“We of course expect that credit rating agencies … in particular during this difficult and sensitive period, act in a responsible and rigorous way,” a spokeswoman said. The Commission, which makes the laws governing rating agencies in Europe, added somewhat ominously: “We will continue to observe very closely what’s going on.”

Tempers in the Commission are rising, with officials angry with what they see as hasty decisions.

They want the muscle of some of Greece’s euro zone partners — the likes of Germany, France and the Netherlands — to be taken into account when agencies calculate a country’s financial health. 

A new regime for rating agencies, which will demand they explain how they make decisions on downgrades, is set to start this December. But could there be worse to come?

With an overhaul of the rules governing all parts of financial services in the works and the distant threat of even stricter regulation of rating agencies, the warning from the Commission to tread carefully on downgrades is unlikely to be ignored.

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