Ratings Agencies Experience the Wrath of France

Credit Rating Firms in EU to Face Sovereign-Debt Limits – Bloomberg.

In response to its recent credit downgrade by Moody’s, France has engineered new rules restricting when credit rating agencies (CRA) may issue unsolicited ratings on sovereign debt. Unsolicited ratings are the changes in letter and number grades that are issued publicly on countries and companies periodically.

After the law is adopted, a CRA may only change its rating on a country on three days a year designated in advance by the CRA and may publicly release the change between the market close and one hour prior to the market open. The CRA may obtain an exception to these rules if justified to the regulators.

Only rules like these could emanate from Europe, the continent of bad ideas. The Eurozone is slowly going broke because of a stagnant economy, poor fiscal management and adverse demographic trends. Rather than fix these issues, it is much easier to shoot the messenger, the CRAs.

The rule is structured so that a CRA may only issue an unsolicited assessment of a country’s rating every 122 days or so, about four months.  If poor budget information was released by a country immediately after one of the designated ratings release days had passed, the CRA would have to wait four months to update its public rating on the country. Meanwhile, another CRA with a different designated ratings release date a few days later would update its placing the 1st CRA at a competitive disadvantage to the 2nd.

What about those regulatory exceptions? The way the legislation is phrased, the regulator would have to approve the exception in advance. A political agency will not allow a CRA to downgrade Spain to junk at an inconvenient time.

Fortunately, this rule will not fly in the United States as it would constitute “prior restraint” of speech. The U.S. will just retaliate after the fact with an S.E.C. lawsuit.

If you do not believe that the Eurozone is trying to blame the CRAs for its ills and retaliate at the behest of France, read this quote form the BBG article carefully:

Barnier proposed the tougher ratings rules after warnings from nations including France and Germany that downgrades of sovereign debt had deepened the bloc’s fiscal crisis. Barnier said last year that ratings companies were guilty of “serious mistakes” and shouldn’t be allowed to “increase market volatility” through ill-timed or unjustified downgrades.

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