Ever since the financial meltdown of autumn 2008 there have been some in the corporate world – not to mention the trading and banking arena – who have questioned the accuracy and usefulness of the present three credit rating agencies (CRAs): Standard & Poor’s (S&P), Fitch and Moody’s. How can agencies that rated collateralised debt obligations (CDOs) as AAA rated be allowed to continue on unchallenged, goes the argument, and do they have time anyway to provide truly useful information to corporate treasurers who want to solidify their financial supply chain?
Do we need more such credit ratings agencies, better oversight of them, or perhaps a European CRA? These questions have all been asked since the great crash of the late ‘noughties’ and the latter issue of a European agency has gained ground in recent years as the eurozone crisis has developed. It received another spur just recently when President Sarkozy of France reacted furiously to S&P’s downgrading of France on 13 January. Some see a bias towards so-called ‘Anglo-Saxon’ capitalism, others merely a lack of competition, or a lack of ‘local’ understanding in the way that the present big three CRAs work, which is why calls for a standalone European CRA are increasing. Some treasurers of course are worried that investment money is being diverted into poorly-rated speculative arenas, making it more difficult for them to raise real money for businesses on the financial markets. Vastly more are concerned about the stability of the financial supply chain and how to accurately assess it using the present tools. Not everyone can go it alone in assessing partners.
gtnews decided to canvass the views of industry insiders, treasurers and commentators to find out what they think of the issue. Our online poll last week, which attracted 75 responses asked: Does the downgrading of France’s coveted AAA rating by S&P on Friday 13 January hasten the likelihood of a separate European credit ratings agency being established? The majority of people thought that a European CRA is imminent and that S&P’s recent actions have speeded up the process. The full results can be seen here. These online polls will be a regular feature of gtnews from now on, so be sure to check the homepage for this week’s question.
Some lively discussions about the need for European CRA or otherwise were also started on our senior level treasury expert linkedin discussion group. A selection of ‘vox pop’ thoughts and opinions are included below from our readers and contacts.
Reactions to a CRA in Europe
|“The commonly perceived image of ratings agencies in the 2008 financial meltdown and in today’s current [eurozone] crisis has understandably led to questions being asked about their niche in the wider financial ecosystem,” says Michael Burkie, BNY Mellon Treasury Services, EMEA market development. “If, out of this evaluation, another more European-orientated agency was created which led to greater diversity in the ecosystem, then that would be received as a very positive development in my opinion.”|
|Kevin Lester, director of risk management and treasury services at Validus Risk Management and a regular blogger for gtnews, thinks the likelihood of a European CRA is quite high, citing a Thomson Reuters report. “Interestingly, the proposal they discuss involves making the new European agency legally liable for the quality of its analysis …this would seem like a step in the right direction. I just hope they make a large provision for legal fees.”|
|According to Carsten Brzeski, senior economist at ING’s Economic Research unit in Belgium, the downgrading of France by S&P, “will not be the sole motivation for the establishment of a separate European credit ratings agency but it should clearly add to the current momentum to develop a continental European counterpart to the ‘Anglo-Saxon’ agencies.
“The timing of the downgrades seems to have left a sour taste in eurozone politicians’ mouths too,” adds Brzeski. “Although it has to be said: don’t shoot the messenger [i.e. don’t blame S&P for pointing out that a downgrade was necessary].”
|The central place of politics in this debate about the need or otherwise for a European CRA is pointed out by Srinivasan Gopalan, a corporate trainer and IT professional from Chennai in India, who commented on our open friends of gtnews linkedin discussion group, that “France probably desires a pliable rating agency.” This begs the question of course about the pliability or otherwise of the existing CRAs, although Gopalan does have the good grace to add: “I suspect that no credit rating agency in the world really functions without being influenced by someone or other at some stage. The very suggestion that a separate credit rating agency for the eurozone be established proves that.”|
|Paul Stheeman, an independent treasury executive and consultant, based in Duisburg, Germany, also correctly identifies the strong political will in Europe for a standalone rating agency, so he expects to see one shortly. “The interesting questions come afterwards though,” he adds. “How will a European CRA differ from the existing agencies and who will follow their rating actions? If it is unbiased, which it should be, then there will be very little difference, if any, to the other agencies. But if it is going to be censored, why should anyone prefer the European solution over the existing ones?”|
|“Is there any reason to think that a new CRA would perform any better or worse than the current ones?, asks Nicholas Franck, previously the treasurer at Agility and presently an independent based out of Zurich in Switzerland. “The problem is the same as that faced by regulators and auditors: the far bigger number of employees in banks and other financial institutions innovate at a faster rate than they, as watchdogs, can keep up with. The solution is to increase the cost of moral hazard to the banks, and more particularly to their management, to reduce this speed of innovation and keep it under control.”|
|Damian Glendinning, the treasurer at laptop manufacturer Lenovo in Singapore, is worried that a CRA founded and controlled by the governments who don’t want to be downgraded will make sure that there are no more politically embarrassing downgrades. “Surely the real issue here is that the rating service has to be paid for – and the only people who are likely to pay for it are conflicted. In the end, inconvenient though it may be, there is only one solution: make sure you fully understand, first hand, the risks inherent in whatever you invest in. As long as we need short cuts, we have to accept the limitations of these approaches.”|
|It is a comment that Magnus Lind, a past director at Swedbank and present chairman of NFS Group’s board and of the European Treasurers’ Peer Group, can only agree. “One cannot delegate responsibility, only execution,” he says. “A European government controlled CRA? Who would invest according to their ratings?”
It’s a question that we may well know the answer to shortly and investors may well soon look to a European agency – make no mistake the pressure for a standalone European CRA is growing apace.
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