October 21, 2011
It may be an affront to free speech, or just a plan that is totally unrealistic, but the EU wants to ban credit ratings of the sovereign debt of its most troubled nations.
“We are actively considering suspending or banning ratings” in cases where nations are making “full efforts” to implement assistance programs, Michel Barnier, the EU’s financial services commissioner, told reporters in Brussels. What countries? What “full efforts”?
This idea only shows how desperate officials in the region are. It is immature to believe that a ban will stop the agencies from rendering opinions of the troubled nations. Agency personnel could be blocked from entering these countries in order to make informed assessments. This probably would result in downgrades due to the lack of fresh information the markets need to make investments. That would be the most dangerous set of circumstance of all for global capital markets investors.
There is to be a summit of the EU region’s leaders this weekend. And there is hope that the summit will produce a negotiated settlement and a facility created to rescue the region’s most financially troubled countries. Now, France and Germany say they are at odds about how such a facility should work and how it will get funds. The meetings will be useless and hardly worth attending if the two largest countries in the region by GDP have found no middle ground. Without it, there will be a perception, almost certainly correct, that Greece will fall into default. The costs for other weak southern European nations to raise money will rise.
A broken summit will bring the big three credit rating agencies back into the capital markets with new opinions about the risks of investment in certain EU nations. Officials in the region can try to suspend those ratings. But investors will not ignore the opinions because the EU says they are “banned.” All the proposed ban says is that the countries with problems want to be left alone and their problems ignored. The chance that will happen is zero.
Douglas A. McIntyre