While everything were well, the rating agencies failed to detect bubbles or danger in the economic systems, and only when the crisis began, they started to see some risks and apply more stricter criteria in their analyses. This caused a multiplier effect which hit the countries stronger, reducing their rating and stressing the funding.
I think it is very positive the fact that the European Parliament had approved stricter rules for the rating agencies. These agencies did not detect the crisis till it exploded and affected the countries, who found themselves punished by the ratings and, however there has been no sanction for Moodys, S&P or Fitch, and that’s why I think that these rating agencies should be penalized.
The European Parliament voted almost unanimously (579 votes for and 58 against) to apply stronger regulation to these agencies to make them more responsible for their errors in case of negligence or willful misconduct. These “rules” will facilitate competition in this oligopolistic industry, which only worked for the interest of the banks, their main clients, and have mercilessly punished many countries, when the main culprits were the banks that were accountable.
When a rating agency downgrades the rating of a country, there is an increase in the risk and in the cost of the future funding; and when the markets are weak, it is much more damaging and difficult for the countries to overcome this spiral.
The new rules will limit the stakes that investors can have in rating agencies, so as to ensure their independence. The rules on rotating the use of rating agencies has been watered down from the initial proposal.
So I think that measures adopted by the European Parliament will be very positive for the transparency of the economy and will reduce the risk of a future financial crisis.
Source| El blog Salmon, European voice.
Image| EU rating
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