European leaders are ramping up their push for a new bond-rating agency after credit-rating cuts in Southern Europe further fuelled the crisis on the continent.
The metastasizing European sovereign debt situation slammed markets again Tuesday, with stocks selling off around the world and the euro dropping to a 13-month low on concerns that more governments on the continent won't be able to meet their obligations without massive financial support such as Greece is getting. It didn't help that continuing protests in Greece raised doubts that the bailout for that country will succeed.
The ratings-agency plan comes in the wake of rating downgrades on Spain, Portugal and especially Greece, whose debt was cut to junk status last week by Standard & Poor's. The credit-rating reductions have caused investors to sell bonds issued by those countries, driving up their borrowing costs and potentially increasing the bill for bailouts financed by the European Union.
"We are undertaking work on creating a European agency," Europe's financial services commissioner Michel Barnier said Tuesday. He said the review of the proposal needs to "very fast, but not off the cuff."
"The power of these agencies is quite considerable, not just for products but also for states," said Mr. Barnier, who has previously criticized the "brutal way" in which Greece was downgraded and said nations deserve "more consideration" from ratings companies.
The proposal for a new ratings agency comes as existing credit-rating agencies such as Standard & Poor's and Moody's Investors Service are being hammered for being too harsh. During the credit crisis, the same companies took beatings for being too lax and issuing top ratings to mortgage-backed bonds that later defaulted.
The European idea is likely to face an uphill battle with investors who will see any government-backed rater as less than credible. The agency would be perceived by many as a pet of the governments that created it, and unlikely to be stringent and reliable on government ratings unless it is set up as a strictly independent body that can't be influenced by politicians.
"If it [such a new agency]is rating government debt, I think it would have very low credibility, at least to begin with," said Bo Becker, a Harvard Business School professor who has studied the impact of new competition in the ratings sector.
If the reason behind the push for a ratings agency is so that governments have influence, "then Greece wouldn't be downgraded, and that would be an awful situation to be in for a rater, because nobody would trust those raters," said Prof. Becker. "You can't have it [a European credit rating agency]be responsive to political demands but also be reputable and respected."
That's not to say such a proposal couldn't work if such an agency were to be made truly arm's length from government. Prof. Becker pointed to the example of central banks, which are created by lawmakers but have managed to establish their independence from governments after years of trying.
In the past week, as the stress on European markets has worsened, the criticism of raters from continental policy makers has been growing steadily louder.
The managing director of the International Monetary Fund, which is backing the Greek bailout, said last week that "you shouldn't believe too much in what they say."
The German government is pushing the plan because it says the current credit rating agencies have conflicts of interest in that they participate in the creation of some of the products they rate.
German Chancellor Angela Merkel said Tuesday that any new rater should be more focused on the long term. It should have "an understanding of basic economic mechanisms different from the existing agencies, more oriented toward … (sustainable dynamics) of the economy and less on the short term."