French anger over S&P downgrade blunder

Michel Barnier, EU internal markets chief, plans to unveil stricter measures to curb credit agency power [Reuters]

The European Union has said that it plans to tighten the reins on credit-rating agencies one day after Standard and Poor’s (S&P) mistakenly downgraded France, stoking fears among investors that the eurozone debt crisis had engulfed one of the region’s pillars.

Michel Barnier, EU internal markets commissioner, said on Friday that the mistake was “serious” and underlined “that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility”.

S&P had issued the erroneous message to subscribers on Thursday, saying that it was downgrading France’s “AAA” credit rating. The message stood for an hour and a half before being retracted.

Though the retraction stated that the message resulted from a technical erro,r and not from any action S&P intended to take against France, some European markets and the US financial market, which were still open at the time, were left affected.

French bonds were hammered on Thursday, with yields on 10-year paper spiking about a quarter of a percentage point, their largest jump since before the euro was launched in 1999.

The euro gained sharply against the US dollar following the retraction, in a sign of investors’ relief.

France, which is fighting hard to retain its top rating in the face of pressure on its debt bonds, has reacted angrily, reinforcing wide criticism of the three big agencies: S&P, Moody’s and Fitch.

Francois Baroin, the French finance minister, called the error “quite shocking” and asked regulators to immediately investigate its causes and consequences.

Al Jazeera’s Jacky Rowland, reporting from Paris, said there has been “absolute outrage” in France over the blunder.

“France is trying to hang on for grim life, if you like, to this cherished ‘AAA’ rating,” she explained.

“There have been lots of rumours about an imminent downgrade and clearly anything that’s likely to spook the markets and push up the cost of French borrowing is something that the French government clearly is going to criticise very strongly.”

Strict measures

In a raft of new proposals, including judicial action, Barnier said that he aims to reduce reliance on ratings, increase competition, increase transparency in sovereign debt ratings and toughen liability in case of misconduct.

Scrutiny of the ratings agencies has been bolstered across the 27-nation EU through this year’s setting up of the European Securities and Markets Authority (ESMA), which requires them to register and sets rules for more transparency, as well as wielding the threat of sanctions in case they violate the rules.

ESMA, which has registered a couple of dozen operators to date, can currently withdraw an agency’s license, order criminal action or slap fines amounting to up to 20 per cent of annual takings.

Barnier wants to toughen sanctions “creating a European framework for civil liability in the case of serious misconduct or gross negligence”.

Because rules differ across the union, 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.

Yearly ‘rotation’

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 will also reduce reliance on ratings agencies by demanding a yearly “rotation” in contracts, a source close to the proposals said.

While Barnier’s spokeswoman Chantal Hughes confirmed that the EU had given up any idea of creating its own agency “at this stage”, she said “we will propose specific measures to promote competition and diversity”.

This could include, for example, the publication of an EU ratings index giving all ratings on a country by all agencies, including small and nascent companies, a source said.

Barnier intends to unveil his proposed legislation in Brussels on Tuesday.