War on Credit Rating Agencies: EU’s Proposed Ban Eased

A stereotyped and knee jerk way politicians deal with crisis has been to shoot the messenger, particularly through various forms of price controls or through muzzling of information.

EU politicians believe that credit rating agencies help fueled the crisis and thus earlier moved to ban them.

From Reuters,

A central plank of European moves to rein in credit rating agencies was diluted by lawmakers on Tuesday, bowing to pressure from banks and companies who argued that proposals were unworkable or counterproductive.

An initial plan for ratings agencies to be rotated or switched every three years will be weakened to apply only to very specific types of credit and only every five years, the source said.

The pullback comes after Europe's biggest companies and banks warned that forcing them switch between so few global agencies could force them to use less well-known bodies carrying less credibility particularly with investors from the United States or Asia.

The proposed reforms come after the credit ratings sector, dominated by the "Big Three" of Standard & Poor's, Moody's and Fitch Ratings, was slammed for giving high ratings to securitised debt or ABS linked to U.S. home loans, leading to the market crisis of 2007 through 2009.

Policymakers worry ratings carry too much clout and have blamed the timing of Greek debt downgrades for making an EU bailout harder. The issue remains pertinent as Moody's is expected to downgrade some of the world's top banks this month.

Politicians believe they can censor away the crisis through price manipulation. Credit rating agencies help shape investors valuations and perceptions of financial securities and consequently their prices.

Although I have a beef with credit rating agencies over their integrity, as conflict of interests have hounded the industry (yes they functioned as institutional accomplices to the bubble blowing phenomenon of the US real estate boom), shooting the messenger will not solve the crisis rooted on an unsustainable and insolvent parasitical arrangement inherent in the structure of incumbent political institutions.