A year after it pledged to curb the power of the credit rating agencies, Europe remains at their mercy as it struggles to introduce regulatory steps and the agencies show little sign of softening their stance on the region's debt crises.
The threat of stricter regulation has not deterred the agencies from downgrading the sovereign debt of Ireland and Portugal over the past several months, as well as demoting Greece further into junk territory.
On Monday, Standard & Poor's slashed Greece's rating by three notches to Triple-C, just four steps from default. It said complicated political and economic conditions meant efforts by the European Union and the International Monetary Fund to rescue Greece were looking increasingly shaky.
Now the big three agencies - S&P, Moody's Investors Service and Fitch Ratings - have their biggest opportunity yet to exercise power over Europe, as they prepare to rule on a second bailout of Greece.
"If you look at the rating agencies' actions in the recent months, when all of the anti-rating agency sentiment was there, they have not shown any sign of backing down," said Sony Kapoor, founder of European think-tank Re-Define.
"They have downgraded Portugal at a very inconvenient time and Greece repeatedly. But there is nothing that has been suggested to replace them - they are here to stay."
The agencies have faced withering criticism from European politicians and officials over the last couple of years - first for failing to warn of risks behind the global credit crisis, then for repeatedly downgrading Greece, Ireland and Portugal despite Europe's multibillion-euro bailouts of them.
Officials argue unjustified downgrades have destabilized financial markets and undermined investors' confidence in the bailouts, pushing up sovereign bond yields around the euro zone. Top rating agency executives have been summoned before European finance ministers to explain the agencies' decisions.
"We have to ask ourselves serious questions about the role they are playing in the crisis hitting certain countries in the euro zone," Michel Barnier, the EU official overseeing an overhaul of financial regulation, told Reuters.
"One has to ask if they are taking into account the efforts those countries are making," Mr. Barnier said, adding that he would consider whether the EU should try to stop the agencies from publishing ratings of countries that were receiving bailouts.
In June last year, Jean-Claude Juncker, chairman of the group of euro zone finance ministers, publicly backed calls by politicians for Europe to set up its own rating agency, to break the hold of the big three on investors' perceptions.
The European Securities and Markets Authority, a regional regulator set up this year with supervisory power over rating agencies, is pressing them to disclose more information about the methods and analytical models they use to reach decisions.
And the EU's executive is drafting laws designed to curb the agencies by increasing their legal liability for ratings, among other things. If approved by European leaders and the European Parliament, the laws could come into force as soon as late 2012.
So far, however, the agencies do not appear to be moderating their judgments in response to such threats. For example, all three have downgraded Cyprus in the last few months, citing its exposure to the possibility of a deep restructuring of Greek debt - even though the EU insists such a restructuring is not in the cards.
The agencies know their brand names could be hurt by any suggestion they were caving in to political pressure. And after they faced criticism for being slow to realize the scale of the global credit crisis, they do not want to appear slow in recognizing the euro zone debt crisis.
"The EU wants them to take a more optimistic view...but they are strongly inclined to be pessimistic," said Mr. Kapoor. "They are paranoid about getting burnt again. The tug of war is going to continue."
Meanwhile, efforts to assert control over the agencies have run into legal and practical obstacles. Although the EU is examining the idea of setting up a European agency to assess the creditworthiness of countries, providing an alternative to the agencies, it is not clear how this would be financed or run. Many in the financial industry believe it would lack credibility as investors would see it as vulnerable to political influence.
A proposal to make the agencies legally liable if a downgrade of a country turns out to be incorrect faces similar difficulties. Officials have come up with only a vague definition of incorrect, raising concern that decisions to apply the law would essentially be political.
The agencies, worried this could expose them to claims from thousands of bond holders, have warned it might prompt them to stop rating some countries altogether - a step which might simply increase uncertainty in financial markets.
Other EU proposals aim to reduce the dependence of the financial system on ratings; currently, regulations require banks to refer to ratings when judging the riskiness of debt and how much capital they must keep to cover any losses. But it is not clear what banks would use in place of ratings.
The first draft of the laws may not be ready until November, said one official familiar with the process. This is months later than some regulatory experts in Brussels had expected.
In coming weeks, Europe will be more vulnerable to the decisions of the rating agencies than it has ever been, as the EU tries to put together a new bailout of Greece that for the first time would include a contribution by private investors in the form of a rollover of Greek debt.
The agencies' evaluation of the rollover will help to determine whether the European Central Bank supports it and whether financial markets respond positively to the bailout.
So far, rating agency analysts have taken a hard line, saying they would probably classify a rollover as a default even if it were presented as voluntary, since it would involve an element of coercion: To some degree, bond holders would be taking part because they feared the consequences of not doing so.
That poses a major problem because ECB president Jean-Claude Trichet has insisted the central bank will not endorse any solution that involves a default.
In the end, some EU officials believe, the problem may be solved with a mild form of rollover: perhaps a commitment by private investors to buy new Greek bonds when existing ones matured. Under this scenario, the agencies would not declare Greece in full default but only in "selective" or "restricted" default, and they would lift this status after a brief period, minimizing any negative effect on markets.
Before they commit themselves to such a scenario, however, EU officials will want to have an understanding that the rating agencies will go along with it. It is not clear whether that would be forthcoming. Wolf Klinz, a German member of the European Parliament who wrote a report on reforming the ratings sector, predicts that addressing the flaws in the system will take up to three years. By that time, the fate of Greece may have been decided.