July 21, 2011 / 1:27 PM / 8 years ago

Lawmakers urge probe of credit rating agencies

LONDON (Reuters) - The European Union should consider a competition probe into the “Big Three” credit rating agencies rather than fund a rival, lawmakers said in a report on Thursday.

The House of Lords’ EU economic and financial affairs committee said any ban by the bloc on rating debt of bailed-out euro zone countries by the agencies would simply be a case of shooting the messenger, as well as unworkable.

Moody’s (MCO.N), Standard & Poor’s MHP.N and Fitch LBCP.PA, which evaluate investment and credit risk, dominate the global ratings sector.

They have been under pressure on both sides of the Atlantic since complex securitised products they rated highly turned toxic from 2007, helping fuel a global financial crisis.

The lawmaker report said the agencies got it wrong in the run-up to the financial crisis, and have been too slow to warn on the dangers of sovereign debt.

But they cannot be held responsible for triggering the current euro zone crisis by downgrading Greece, Ireland and Portugal, it said.

“The rating agencies did not precipitate the crisis, nor do we believe it is possible to say with any certainty that they exacerbated it,” committee chairman Lord Harrison said.

The sector angered EU policymakers last year when it downgraded Greece during bailout talks, a move which they say made matters worse.

Such downgrades merely reflect the seriousness of the problems, the report said.

S&P said it was ahead in identifying diverging credit risk in the euro zone.

“Before the crisis, the market valued Greek and other sovereign debt from the periphery countries on a par with German bonds, but we always rated these sovereigns significantly lower — and we started downgrading them further as early as 2004,” S&P spokesman Martin Winn said.

Moody’s and Fitch had no immediate comment on the report.

EU Internal Market Commissioner Michel Barnier wants the bloc’s finance ministers to discuss a possible ban on agencies rating bailed-out countries.

“Commissioner Barnier’s proposal that sovereign debt ratings be suspended for countries in international financial assistance programmes is wholly impractical and smacks of censorship,” the report said.

It also urged Barnier not to press on in his autumn draft law with proposals to establish a publicly funded European credit rating agency or to give countries three days’ notice of a downgrade so they have time to challenge it.

A public-funded agency would lack credibility with markets, and plans to give countries more advanced warning of rating changes are flawed, it added.

“They should, however, consider launching a thorough competition inquiry into the credit rating industry,” said the report, a copy of which has been sent to Barnier.

Investors must take responsibility for their decisions, the lawmakers said, and welcomed a move announced by Brussels on Wednesday to dilute the role of ratings in determining bank capital buffers.

The report is expected to shape Britain’s views when EU states and the European Parliament come to amend and approve Barnier’s measures.

Reporting by Huw Jones; Editing by Mike Nesbit and David Hulmes

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