Europe moves to check influence of rating agencies

Europe moved swiftly Thursday to counter the three big “oligopolistic” ratings agencies, a day after the unexpected downgrade of Portugal's government debt to junk status wreaked havoc in global markets and spread uncertainty once again about the continent’s ability to overcome its fiscal woes.

In a rare and seemingly coordinated series of rebukes over Euro-bashing, officials, bankers, and institutions loudly condemned Moody’s decision, which is now more likely to be mirrored by the other two big agencies, Fitch and Standard & Poor’s.

Germany called for the creation of a European rating agency, and the Frankfurt-based European Central Bank (ECB) decided to accept Portuguese-backed debt, in effect preempting any future downgrade and undermining the agencies’ influence over markets.

Markets rebounded Thursday following the ECB's decision, after being pummeled the day before. The cost of borrowing, which reached a record high for Italy and soared in Spain and throughout the European block, also came down slightly in an apparent sign that the EU’s reaction had calmed markets.

The ECB’s decision to waive a minimum rating required to accept collateral for credit from Portugal basically means Europe should trust its own assessment of Portugal, not those of the three agencies. Greece has a similar exception.

“If they want to decrease the influence of rating agencies, governments have to depend less on their actions, and that is what the ECB’s is doing,” said Roberto Ruíz Scholtes, UBS director of strategy in Spain.

ECB President Jean-Claude Trichet said “the functioning of credit rating agencies is not optimal,” and that “it is also clear that a small oligopolistic structure is not what is desirable at the level of the global finance.”

The EU Commission’s financial regulator Michel Barnier also issued a veiled threat. “I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect EU rules,” Mr. Barnier said in a statement earlier this week. “They should learn the lessons from the past.”

German Foreign Minister Guido Westerwelle called for the creation of a regional rival to the three agencies. “It’s necessary to establish an independent European rating agency,” he said. "This must be a goal that we all work on intensively.”

Earlier, German Finance Minister Wolfgang Schaeuble called for limits to be set on the big three and of the “need to break up the oligopoly of rating agencies.”

The downgrade, announced late Tuesday, was based on heightened risks that the new Portuguese government will fail to deliver on its deficit reduction and macroeconomic stabilization plan that expires mid-2013. The failure of the plan would likely force it to seek a second public bailout, much like Greece is expected to do within weeks.

But European officials have said the downgrade to below investment-grade was unjustified and untimely because the new government only recently took over and no new data has been released since to support the warning.

At issue is not whether Portugal will require another bailout or restructuring its debt before it can return to capital markets. It may, and indeed most analysts expect it to. But rating agencies in principle require a higher bar than speculation, the European criticism goes.

Still, Europe’s ability to replace or do away with rating agencies is limited. Much of financial regulation is based on agencies’ ratings. A government-backed rater would also raise suspicions about the objectivity of its ratings. But more importantly, analysts say, the market is already gradually unwinding its dependence on the big three, without any public interference.

“Bond investors have long abandoned those criteria,” said Mr. Ruíz, citing strong recent appetite for Spanish debt. "The agencies are important short term, but in the long term their influence is marginal."

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