Rating agencies in EU firing line

EU commissioner Michel Barnier on Tuesday presented sharp new curbs on credit rating agencies but was forced to back down on a bid to protect victims of Europe's debt crisis from agency scrutiny. "I want to draw lessons from the crisis," the internal markets commissioner said. "These agencies are very important ... I believe they're too important." While the new measures, yet to be approved, aim to tighten the rules of the ratings agencies, Barnier had to back down on plans to allow the temporary suspension of ratings for countries under EU-IMF bailout programmes. "I considered that more time was needed... to detail the technical measures as they would apply," Barnier said after sources cited deep disagreement within the 27-strong European Commission executive in the hours before a delayed press conference. The former French cabinet minister has frequently fallen foul of London, home to four-fifths of the EU's financial services industry, for what big investors there have claimed is a campaign to weaken the City's grip. The ratings industry is dominated by Moody's, Standard & Poor's and Fitch. Many commentators have blamed these and other rating agencies for having helped create the 2008 global financial crisis by failing to properly evaluate the risk of US mortgage investments before the bubble burst. The new proposals would enable any EU state or investor to demand damages before a civil court for losses liable to a credit rating agency. The proposals will also seek to whittle away the role of the agencies by urging banks and other financial institutions to do their own credit rating homework rather than systematically calling on the agencies. They would seek to reduce reliance on ratings agencies by demanding a yearly "rotation" in contracts. "I don't want to break the thermometer," Barnier said. "I just want to make sure it works properly." Moody's said in a statement that the measures would do nothing to help stabilise credit markets or strengthen investor confidence "as they would harm the quality and independence of the ratings." On Monday, Barnier told French television that ratings agencies regulated by the European Securities and Markets Authority (ESMA), "won't have the right, if ESMA decides, to rate certain countries for a certain time that are receiving an international support programme from the IMF or European Union." Greece, Ireland and Portugal all suffered rating downgrades that accelerated unsustainable rises in their borrowing costs over the past two years, with Spain and Italy -- which has opened its books to international auditors -- also coming under pressure in recent days. But the commissioner said of the disappearance of the ratings suspension from the final legislative proposal that now will be put to EU states and European Parliament lawmakers: "We are going to take the time to come back on this question." He said his idea was "innovative, perhaps too innovative," but invited the EU parliament, where he was speaking, to resurrect its spirit during deliberations. Barnier was also leaving for a later date an end to the practice whereby clients, companies as well as governments, pay rating agencies for advance notice on their own credit worthiness. The commissioner said some of the ideas he would still like included were "inspired" by last week's erroneous downgrading of France by Standard and Poor's, which cited a technical error. France, which economists say is struggling to hold onto its Triple-A rating alongside the stronger eurozone economies of Germany, the Netherlands, Austria, Finland and Luxembourg, recently announced deep budget cuts in a bid to retain its top status. The other big idea EU colleagues had suggested when he first began drawing up these plans last year -- to create Europe's own rating agency -- was ruled out on the grounds it would cost 300 million euros to set up and would face accusations it was both "judge and jury." ESMA, which has registered a couple of dozen ratings firms to date, can already withdraw a company's licence, order criminal action or slap fines amounting to up to 20 percent of annual takings. Shortly before Barnier spoke, the European Parliament voted to ban "naked" credit default swaps, a controversial financial instrument used by traders to bet on the risk of a country failing to pay off debt and which have been blamed for encouraging highly speculative trade.