Europe: Can't Fix Credit? Muzzle The Ratings Agencies

 |  Includes: BUND, BUNL, BWX, ITLY
by: Richard Shaw

Bloomberg reported today that the European Commission has issued a draft plan placing limits on the influence of credit rating agencies and to specify how often and when they may issue ratings on sovereign debt.

Some Directly Relevant European Debt ETFs:

  • BWX: SPDR Barclays International Treasury Bond ETF
  • BUND: PIMCO Germany Bond Index ETF
  • BUNL: PowerShares DB German Bund Futures ETN
  • ITLY: PowerShares DB Italian Treasury Bond Futures ETN

The proposed rules, according to Bloomberg, would require "that each credit rating firm must pick three days a year when they would be allowed to give so-called unsolicited assessments of government's creditworthiness ... firms may get a chance to issue unsolicited ratings ... outside those dates if they can justify it to regulators."

Clever enough. Make the free flow of independent opinions illegal on 99% of days, and knowing which days opinion release is legal, do things that would cause a change of opinion far enough away from those days in hopes the rating effect will be muted. Then put a bureaucrat who knows on which side his bread is buttered in charge of determining if ratings publication should be permitted on an unscheduled basis.

Ratings Firm: "Please excuse the interruption of your day sir. Your government just did something really stupid, and we would like to issue a negative rating due to that, but our scheduled opinion release date is four months away. Would you please give us permission to criticize your employer now rather than later?"

Bureaucrat: "No."

It's not quite censorship, but it's close. It's not quite tyranny, but it sure isn't freedom. It is not dishonest, but ...

They also intend to limit the ownership of any credit rating agency to 5% by any investor. At the same time they intend to establish a "European credit rating agency." If that is what it sounds like - a government operated agency to evaluate its 100% owner - then the boundary between analysis and propaganda would be just a wee bit blurred.

We would have a lot more faith in a credit rating agency with a 10% or 20% ownership by a private company, than a 100% government owned agency tasked with evaluating its owner, and run by politically appointed managers.

Admittedly, just exactly what the European credit rating agency would be is not clear, but what is clear is that Europe knows what it is and will be doing things that logic would say are adverse to good credit worthiness - and they want to mute and blunt the ability of ratings to impact the market's reaction to what they do.

Unfortunately for the European politicians, it won't work. Markets can, do and will issue daily credit ratings opinions on sovereign debt as they set bid and ask prices, and there is not a damn thing European politicians can do about it.

That said, this obvious attempt at the suppression of the free flow of information is a bad sign.

We would expect something like this coming from Vladimir Putin in Russia, or Cristina Fernández de Kirchner in Argentina, but to watch Europe move toward the dark side is very sad.

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