Tough Medicine to Swallow?

The European Commission released a new consultation today on credit ratings agencies, continuing the post-crisis reform trajectory that began with the “CRA Regulation” (Regulation EC 1060/2009) which comes into full effect next month. The new consultation is a good map of the issues thought to be still unresolved with regard to credit ratings agencies, and is probably also a good indication of the potential for unintended consequences. Take, for example, the issue of sovereign debt. Bloodied by the experience of having Greek sovereign debt downgraded earlier this year, the EC proposes some fairly blunt tweaks: the “issuer-pays” conflict of interest would be resolved by forbidding EU member states from paying to be rated, and ratings agencies would have to offer up their sovereign research reports at no charge. Quite the business model. Ratings agencies also would have to offer governments a full three days’ notice (well beyond the 12-hour notice for other issuers), purportedly to allow sovereigns ample opportunity to correct factual issues that underlie ratings, as well as agree to release ratings only after the close of trading business. The intent seems to be to give markets time to digest and react rationally to ratings downgrades, but it is just as easy to imagine plenty of leaks in the three-day window that would spur rumors, heighten emotions, and destabilize markets. The medicine in this case seems more harmful than what ails the patient.