The German government's idea for a new European-based credit rating agency comes at a vulnerable time for the tarnished sector but such a body will have to offer more than a copycat service if it is to succeed. The new German coalition government's financial policy package agreed last weekend backed the development of a European rating agency, but details remain sketchy.
It revives an old chestnut in Europe where some policymakers want the dominance of three global agencies, Standard & Poor's, Moody's and Fitch, diluted by a home-grown rival. Standard & Poor's and Moody's are American. Fitch, even though owned by Fimalat of France, is perceived by some as being American with its chief executive based in New York.
European policymakers have said they want more competition and transparency in the sector as well as stronger local connections. But experts say any new agency would have to offer a global service and stand on its own feet as a business to avoid accusations of being beholden to a government.
"I think there is a really strong opportunity now. They are weakened by what's happened," said Barbara Ridpath, chief executive of the International Centre for Financial Regulation. "But they have to demonstrably do it differently, whether in business policy or business model," said Ridpath, a former managing director of S&P in Europe. Credit rating agencies have been widely blamed for giving high ratings to securitised products that became untradable as the credit crunch unfolded, creating financial mayhem. Nevertheless, ratings are likely to continue playing a key role in guiding investors who buy bonds and shares.
The European Union has adopted a law forcing agencies to register and be supervised. The United States and Japan are also cracking down but disquiet over their pervasive role continues. EuropeanIssuers, which represents Europe's 9,200 listed companies, wants all references to credit ratings stripped from EU law, saying there is too much reliance on ratings. The Obama administration has unveiled an initiative to this effect.
Germany has been at the forefront of past attempts to create a new European credit ratings agency. A project launched in 1989 fell by the wayside after media giant Bertelsmann withdrew. "I think the time is now right to think again about this idea," said Oliver Everling, who was the project's secretary.
"They are not so stupid as to believe it would be easy to set up a new ratings agency from scratch that would be an immediate competitor to S&P and Moody's," Everling said. A newcomer could add value in rating products like closed- end mutual funds, Everling said. "If they do not add anything new but only say 'me too, we provide ratings like S&P and Moody's', then I think it's bound to fail," Everling added.
A new agency would have to show how it deals with conflicts of interest such as backing from a government whose bonds it may be rating, or requiring fees from companies whose debt it rates.
Users may not be interested in a regional offering as they look at what's on offer from across the world. "We would be wary of any European initiative," said Peter Montagnon, director of investment affairs at the Association of British Insurers, whose members are responsible for investments worth 1.5 trillion pounds ($2,456 billion).
"We have a long-standing view that the capital markets are global and the creation of regional agencies, especially with official backing, will tend to fragment the industry and will not help," Montagnon said. A new ratings agency would have to quickly tackle the issue of credibility and independence and show a track record almost from day one, which could be done by poaching key staff from existing agencies, Ridpath said. Standard & Poor's, which issues over a million ratings a year, was unmoved by the German plan.