Europe Moves to Curb Power of Ratings Agencies, Sort of

LONDON - European legislators this week struck the latest blow in the Continent's battle with the international ratings agencies by approving new controls that one commentator said on Thursday marked the end of their “golden age.”

The measures follow a string of downgrades of the sovereign debt of European states that have dented national pride as much as the ability of governments to raise money in the marketplace.

The plan principally targets the “big three” U.S.-based agencies - Fitch, Moody's, and Standard & Poor's - which are accused by their European critics of exercising too much power and not enough responsibility in assessing national and corporate debt.

They have been accused of exacerbating Europe's debt woes by issuing downgrades at delicate moments of the euro crisis, and their judgment has been challenged over the top scores they awarded to doubtful debt ahead of the 2008 financial meltdown.

In the latest downgrade, Moody's las t week took away France's prized AAA rating, citing the country's loss of competitiveness and excessive regulation.

Under measures approved by the European Parliament and awaiting endorsement by European Union governments, the agencies face new rules that include making it easier for investors to sue them if they get it wrong.

In a possible foretaste of that, prosecutors in southern Italy were reported to have called for seven executives at Standard & Poor's and Fitch to be tried over downgrades that were made to Italy's sovereign debt rating last year.

“In tough times it's natural that people are looking for a scapegoat for all the turmoil,” Management Today, a British business news Web site, said of the Italian case.

Standard & Poor's reportedly dismissed the Italian claims as “entirely baseless and without any merit.”

The latest moves in Europe came after the big three warned that the United States could be facing its own downgrade as it approaches the so-called fiscal cliff.

The measures approved by the European Parliament would bar the agencies from rating corporate or national debt if they did not have sufficient quality information on which to base their findings.

They would also be subject to a timetable of when they could publish their unsolicited assessments of European debt.

The new rules would also bar agencies from rating companies in which their shareholders have a major stake. That could prevent ratings being issued on Warren Buffett's Berkshire Hathaway Inc. by Moody's, an agency in which the Sage of Omaha has a 12.75 percent stake.

The Financial Times questioned how such rules will be implemented in practice and how they would apply to ratings in the United States.

Michel Barnier, Europe's internal market commissioner, welcomed agreement on rules that aimed to reduce “the over-reliance on ratings, eradicate conflicts of interest, and establish a civil liabili ty regime.”

Others were more skeptical about the impact of what, in the end, was a compromise deal that did not go as far as some European critics of the agencies wanted.

“This reform is no big breakthrough in changing the rating agency market,” Sven Giegold, a German member of the European parliament, told Reuters. “It's a step towards better supervision but there are no big structural changes.”

Les Echos, the French business daily, also suggested that the Europeans appeared to have lost interest in setting up their own rival agency to replace the big three. It said there was no longer much talk about that project, which the European Commission is due to report on in 2016.

Norbert Gaillard, an economist who specializes in the sector, said many investors were concerned about the creation of a public or quasi-public agency that would have to be set up from scratch.

“You might as well say it's been put in the cupboard and will never se e the light of day,” he told Les Echos.