EU watchdog ‘needed’ for rating agencies

By Dana Spinant

Date: 13/11/03

GIORGOS Katiforis, the author of a European Parliament report on rating agencies, has called for the creation of an EU regulatory forum to supervise the giant American agencies which dominate the sector.

The present "enormous imbalance" between European and American rating groups "cannot be helpful" to EU-US relations, the MEP has warned.

There is growing unease in Europe about the power of rating agencies, which determine the creditworthiness of companies - and even countries.

Just two companies control around 90% of the market - Moody's and Standard & Poor's (S&P) - and both are American. Their global reach is immense.

Moody's, founded in 1900, has offices in 18 countries and boasts that its ratings track 100 "sovereign nations". S&P, created in 1941 by the merger of Standard Statistics and Poor's Publishing Company (whose roots go back to 1860), has more than 300 offices in 33 countries. The latter has &036;1.5 trillion in investors' assets indexed to its indices and claims that its analysts "keep the world's financial markets functioning".

The third largest agency, Fitch Ratings, also has its roots in the US, although following a merger in 1997 it became a subsidiary of Paris-based business services group Fimalac.

Concerns over the rating agencies' failure to spot the impending corporate scandals at Enron and WorldCom until it was too late prompted some European politicians to discuss the possibility of creating a powerful agency based on the European mainland. (Fitch is dual headquartered in New York and London.)

Katiforis believes it would "good to have a European rating agency" but does not see how one could be constructed "artificially". "It would be beneficial to a balanced financial market if we had two or three poles, and not have a unipolar world in this respect," he explained.

However, the realities of the market place mean it would be tough for a European challenger to grow, as "in this sector, the competition is terrible".

Concern about the US-based agencies' domination is not based on fear of discrimination - "I do not have any explicit accusation that they have a bias against European companies," says the Greek deputy - but he acknowledges that the "huge lack of balance between Europe and America . . . is not healthy".

The chairwoman of the Parliament's influential economic and monetary affairs committee, German MEP Christa Randzio-Plath, has recently urged support for a European rating agency to correct this imbalance. Katiforis admits it would be useful to achieve "some reciprocity if we find a [European] agency that could make it", but the creation of a regulator in Europe should be the priority.

"Big rating agencies have to register with [US financial markets watchdog] the Security and Exchange Commission. They should also register with a European supervisory body," added Katiforis.

He envisages this being composed of officials from member-state market regulatory bodies and, perhaps, a representative from the European Ombudsman's office. This would be a step towards introducing "more comprehensive accountability and control, without damaging their independence".

He believes such a body would be accepted by the major rating agencies, which would register with it to ensure they continue to win business from EU governments. "We cannot impose it on the rating agencies, but if they don't register with this body and do not respect our principles or conditions, there are ways of ignoring them in a way which is not profitable to them."

The Greek MEP admitted that an international watchdog remains a distant prospect - "maybe in 50 years".

There is growing disquiet in Europe about the power of rating agencies, which determine the creditworthiness of companies - and even countries. Just two companies control 90% of the market, and both are American. There are now calls for the creation of a European Union regulatory forum to supervise the companies that dominate the sector.