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EU Queries CRA Impartiality

7 July 2011 - News - Editor

There has long been controversy over the influence credit rating agencies have on stock markets, with European Union members expressing concern that credit ratings can sometimes be biased. This could become self-fulfilling prophecies by influencing decision making processes of investors. Back in May 2010, Greece's credit rating was downgraded to 'junk' by credit rating agencies, with both Spain and Portugal being downgraded to just above junk rating. The downgraded rating had an almost immediate impact on worldwide markets, with investors selling bonds that had been issued by the three countries in question, which in turn pushed up borrowing costs, resulting in the need to request European Union financed bailouts. There was even talk at the time of creating a European credit rating company, although many expressed concern that investors would question the credibility of a credit rating agency charged with the task of rating the countries that created it.

The debate about the power credit agencies wield has reached new heights as a result of Moody's downgrading Portugal's credit rating to 'junk' status. Although it has been publicly stressed by French European Affairs Minister Jean Lionetti that credit rating companies were not the decision makers in rendering aid to euro-area states, it's been acknowledged that they become an unwelcome aspect of the decision making process due to their considerable influence on investor psyche. President of the European Commission, Jose Manuel Barroso, noted that Moody's negative outlook and its decision to drop Portugal's rating will undoubtedly fuel speculation in financial markets. He also noted they were addressing the problem of Europe's reliance on external credit rating agencies, most of which are based in the United States, such as Moody's and Standard & Poor's, with Fitch Ratings having dual-headquarters in New York and London.

Investors are already very concerned about the outcome of Greece's austerity measures and private sector strategies. Should these fail, it would put huge pressure on Europe's bankers to take action. Portugal’s credit rating downgrade adds to the already considerable burden in Europe. Among the reasons cited for the downgrade, Moody’s reportedly listed the European Union's management of the area's financial crisis. Barosso stated that the EU is planning on putting measure in place to improve transparency and methodology in the rating of sovereign debt, and would also be looking at addressing civil liability by credit rating agencies.

 


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