Credit rating companies face curbs on when they can assess government debt and restrictions on their ownership under draft plans agreed upon by the European Union to limit the industry’s influence and tackle conflicts of interest.
Investors will also get the right to sue ratings companies if they lose money because of malpractice or gross negligence in the plans agreed upon yesterday by lawmakers from the European Parliament and Cyprus, which holds the rotating presidency of the EU.
“We have reached a good result,” Michel Barnier, the EU’s financial services chief, said in an e-mailed statement. “With this agreement, we are taking another important step towards financial stability.”
French bonds and U.S. Treasuries have both made gains since the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on a nation’s borrowing costs. The return on France’s sovereign debt has been 8.9 percent since Standard & Poor’s stripped the country of its AAA status in January, more than double the rest of the global government bond market, according to Bank of America Merrill Lynch indexes.
Barnier proposed the stricter ratings rules last year after warnings from nations including France, where he formerly served as foreign minister, and Germany that downgrades of sovereign debt had deepened the bloc’s fiscal crisis. Barnier said last year that ratings companies were guilty of “serious mistakes” and shouldn’t be allowed to “increase market volatility” through ill-timed or unjustified downgrades.
The European Commission, the 27-nation EU’s executive arm, has said that tougher regulation is needed to boost competition for the so-called big three ratings companies, Fitch Ratings Ltd., Moody’s Investors Service Inc. and S&P. Negotiators at yesterday’s meeting brokered a draft deal on the rules, which must be formally approved by governments and the full parliament before they can be implemented.
Lawmakers and officials also agreed to largely scrap proposals from Barnier to force businesses to rotate the ratings company they use to assess their debt. As part of the draft deal, the rotation rule will be limited to re-securitizations, such as collateralized debt obligations, that are repackaged and used to back another round of securitized debt.
On sovereign debt ratings, lawmakers and officials agreed that each credit rating firm must pick three days a year when they would be allowed to give so-called unsolicited assessments of governments’ creditworthiness, according to Jean-Paul Gauzes, a lawmaker involved in the talks. Ratings firms may get a chance to issue unsolicited ratings -- those that haven’t been requested and paid for by a client -- outside those dates if they can justify it to regulators.
“Credit rating agencies will have to be more transparent when rating sovereign states, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings,” Barnier said. “They will have to follow stricter rules which will make them more accountable for mistakes.”
Lawmakers had to overcome “perverse” resistance from national governments to the curbs, Gauzes said.
Moody’s this month joined S&P in removing France’s top credit rating, cutting the debt one level to Aa1 and maintaining its negative outlook. S&P lowered the rating by one level to AA+ from AAA on Jan. 13.
The U.S. has been deemed more creditworthy by investors since S&P removed the nation’s AAA grade in 2011, with 10-year note yields dropping to a record this year. For France, Europe’s second-biggest economy, further declines in borrowing costs would provide a spur to French President Francois Hollande’s socialist government as it struggles with a record trade deficit and an unemployment rate at the highest in 13 years.
Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974. Yields were measured after a month relative to U.S. Treasury debt, the global benchmark.
Negotiators at yesterday’s EU meeting also agreed that sovereign debt ratings “will only be published after the close of business and at least one hour before the opening of trading venues in the EU,” the EU commission said in a statement.
The EU also plans to block any investor from owning stakes of more than 5 percent in more than one rating company, Gauzes said in an interview after the meeting.
Moody’s may be banned from rating products issued by Warren Buffett’s Berkshire Hathaway Inc. under the plan, which would stop companies from giving rankings for debt issued by shareholders that hold a more than a 10 percent stake. Berkshire Hathaway holds a 12.75 percent stake in Moody’s.
The commission said it will weigh further steps to regulate the credit ratings market, including the creation of a “European credit rating agency.” Officials will report on the possible step by 2016, it said.
“We look forward to seeing the final text of the latest EU regulation and will work closely with our regulators to implement the rules when they are introduced, as we have done with the existing” regulations, Ed Sweeney, a spokesman for S&P, said in an e-mail.
“Moody’s has not yet seen the final text of the agreement,” Michael Adler, a company spokesman, said in an e-mail. “While we fully support the G20 agenda on credit ratings, we had expressed significant concerns about the potential market ramifications of some of the proposed policy measures.”