22/07/2011
By Adam Cadle
Eurozone’s debt crisis is not to be blamed on the credit rating agencies (CRAs), says the Lords EU Economic and Financial Affairs and International Trade Sub-Committee in a new report entitled Sovereign Credit Ratings: Shooting the Messenger?
There has been a great deal of controversy surrounding CRAs during the sovereign debt crisis where they have been accused of failing to predict the crisis and then precipitating it by downgrading the ratings of euro area sovereigns in Greece, Ireland and Portugal.
However the report, which was published after a four-month long inquiry by the Committee into the sovereign debt crisis, explains that whilst the CRAs role in the 2008 banking collapse was rightly criticised, they should not solely be blamed as they have had to operate against a backdrop of shifting policy initiatives from EU Member States which complicated their work.
A series of recommendations have been proposed by the Committee to combat risks in some Euro Member States, such as market investors not just relying on decisions by CRA staff but making their own decisions on the best investment options. EU Governments should also focus on correcting the flawed market structures which give undue weight to the rating agencies' opinions and credit rating agencies must learn from their failure to identify mounting risks in some euro area Member States, it added.
The Committee also recommended that the European Commission should not press forward with proposals to establish a publicly funded European credit rating agency. They should, however, consider launching a thorough competition inquiry into the credit rating industry.
Speaking about the CRAs, Financial Affairs and International Trade Sub-Committee chairman Lord Harrison said: “The criticism they have faced has largely been unjustified. The rating agencies did not precipitate the crisis, nor do we believe it is possible to say with any certainty that they exacerbated it. Valid concerns over their role in the 2008 financial crisis should not be allowed to colour an objective assessment of their decisions relating to the creditworthiness of some Member States’ sovereign debt. Their recent downgrades merely reflect the seriousness of the problems facing countries such as Ireland, Portugal and Greece.
“Ratings are ultimately subjective predictions. Instead of criticising these downgrades, Member States should be working to amend the flawed financial rules which lend these judgements excessive weight. Investors, meanwhile, should view ratings as opinions that need to be balanced and confirmed by other market indicators. The final responsibility for investment decisions lies with investors.”
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