As we continue our coverage of the European sovereign debt crisis, the focus has once again turned to credit agencies (see today's story, more in next week's WBJ). Again, European leaders are calling for a “European” rating agency that would be more “credible” and “transparent” than the current Big Three (Moody's, Fitch and S&P).
These leaders seem to be forgetting that a ratings agency created by European governments with the not-so-express purpose of being kinder on European governments in its ratings would by definition be less credible, and that a European-based ratings agency already exists (Fitch is dual-headquartered in New York and London, and its parent company, FIMALAC, is headquartered in Paris).
But besides all that, these calls seem to miss the point that what Europe needs to be doing is creating a streamlined, effective decision-making mechanism that would allow the EU to react quickly to crises. That would go much further towards increasing confidence and credibility in European structures than would an artificially created ratings agency.
Indeed, Adam Narczewski, a Polish economist who is managing director of XTB Hungary, thinks that the existing ratings agencies have lost much of their credibility themselves, and predicts that one created by Europe would spur a kind of “race to the bottom.” His preferred solution? A single, state-sponsored global ratings agency. He admits it's a “utopian” solution, but posits that the era of privately run ratings agencies – which may be inclined to give positive ratings to those companies that pay their bills – has run its course. It's an interesting perspective, at the very least.
Here's what he had to say, in full:
The importance and reputation of the main rating agencies have diminished as they are responsible for some bad calls made in the last 2-3 years. The market itself proved what it thinks of their decisions (see how cutting the USA’s rating caused its bond yields to decrease, ignoring France and EFSF’s rating cut).
Creating new, 'European' rating agencies might only worsen the situation, allowing more institutions to rate debt. If that happens, I see 'Europe' and the 'US' competing with each other to prove which one is worse (not better, that is the difference) but this could be an ugly fight. The more rating agencies, the less deciding power they have, but at the same time they can cause more confusion with their decisions.
I agree that credit rating cannot be done in the current form, changes need to be made. It seems the idea of privately owned rating agencies has been exhausted. I see a solution (a utopian one) in a global, independent, rating agency, government/state-sponsored, with the best analysts rating credit. If more agencies enter the market, the more inclined they would be to rate better the credit they are paid to rate.
Are we in for a revolution in the global credit ratings system? That's unlikely. But as these agencies continue to undercut efforts to shore up Europe's sovereign debt system, it's hard to see the status quo remain in place for much longer.
