Credit rating companies face curbs on when they can assessgovernment debt and restrictions on their ownership under draftplans agreed upon by the European Union to limit the industry'sinfluence and tackle conflicts of interest.

Investors will also get the right to sue ratings companies ifthey lose money because of malpractice or gross negligence in theplans agreed upon yesterday by lawmakers from the EuropeanParliament and Cyprus, which holds the rotating presidency of theEU.

“We have reached a good result,” Michel Barnier, the EU'sfinancial services chief, said in an e-mailed statement. “With thisagreement, we are taking another important step towards financialstability.”

French bonds and U.S. Treasuries have both made gains since thecountries were stripped of their AAA credit ratings, in a signalthat downgrades may have little bearing on a nation's borrowingcosts. The return on France's sovereign debt has been 8.9 percentsince Standard & Poor's stripped the country of its AAA statusin January, more than double the rest of the global government bondmarket, according to Bank of America Merrill Lynch indexes.

Barnier proposed the stricter ratings rules last year afterwarnings from nations including France, where he formerly served asforeign minister, and Germany that downgrades of sovereign debt haddeepened the bloc's fiscal crisis. Barnier said last year thatratings companies were guilty of “serious mistakes” and shouldn'tbe allowed to “increase market volatility” through ill-timed orunjustified downgrades.

The European Commission, the 27-nation EU's executive arm, hassaid that tougher regulation is needed to boost competition for theso-called big three ratings companies, Fitch Ratings Ltd., Moody'sInvestors Service Inc. and S&P. Negotiators at yesterday'smeeting brokered a draft deal on the rules, which must be formallyapproved by governments and the full parliament before they can beimplemented.

Lawmakers and officials also agreed to largely scrap proposalsfrom Barnier to force businesses to rotate the ratings company theyuse to assess their debt. As part of the draft deal, the rotationrule will be limited to re-securitizations, such as collateralizeddebt obligations, that are repackaged and used to back anotherround of securitized debt.

Unsolicited Assessments

On sovereign debt ratings, lawmakers and officials agreed thateach credit rating firm must pick three days a year when they wouldbe allowed to give so-called unsolicited assessments ofgovernments' creditworthiness, according to Jean-Paul Gauzes, alawmaker involved in the talks. Ratings firms may get a chance toissue unsolicited ratings — those that haven't been requested andpaid for by a client — outside those dates if they can justify itto regulators.

“Credit rating agencies will have to be more transparent whenrating sovereign states, respect timing rules on sovereign ratingsand justify the timing of publication of unsolicited ratings,”Barnier said. “They will have to follow stricter rules which willmake them more accountable for mistakes.”

Lawmakers had to overcome “perverse” resistance from nationalgovernments to the curbs, Gauzes said.

Moody's this month joined S&P in removing France's topcredit rating, cutting the debt one level to Aa1 and maintainingits negative outlook. S&P lowered the rating by one level toAA+ from AAA on Jan. 13.

The U.S. has been deemed more creditworthy by investors sinceS&P removed the nation's AAA grade in 2011, with 10-year noteyields dropping to a record this year. For France, Europe'ssecond-biggest economy, further declines in borrowing costs wouldprovide a spur to French President Francois Hollande's socialistgovernment as it struggles with a record trade deficit and anunemployment rate at the highest in 13 years.

Predicting the consequences of a rating change by S&P orMoody's may be little better than flipping a coin, with yieldsmoving in the opposite direction than suggested 47 percent of thetime, according to data compiled by Bloomberg in June on 314upgrades, downgrades and outlook changes going back to 1974. Yieldswere measured after a month relative to U.S. Treasury debt, theglobal benchmark.

Negotiators at yesterday's EU meeting also agreed that sovereigndebt ratings “will only be published after the close of businessand at least one hour before the opening of trading venues in theEU,” the EU commission said in a statement.

Curbing Ownership

The EU also plans to block any investor from owning stakes ofmore than 5 percent in more than one rating company, Gauzes said inan interview after the meeting.

Moody's may be banned from rating products issued by WarrenBuffett's Berkshire Hathaway Inc. under the plan, which would stopcompanies from giving rankings for debt issued by shareholders thathold a more than a 10 percent stake. Berkshire Hathaway holds a12.75 percent stake in Moody's.

The commission said it will weigh further steps to regulate thecredit ratings market, including the creation of a “European creditrating agency.” Officials will report on the possible step by 2016,it said.

“We look forward to seeing the final text of the latest EUregulation and will work closely with our regulators to implementthe rules when they are introduced, as we have done with theexisting” regulations, Ed Sweeney, a spokesman for S&P, said inan 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 wefully support the G20 agenda on credit ratings, we had expressedsignificant concerns about the potential market ramifications ofsome of the proposed policy measures.”

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