Sovereign Credit Ratings: EUC Report

Baroness Noakes Excerpts

Tuesday 15th November 2011 Lords Chamber

[Baroness Noakes]

My Lords, I had not originally intended to take part in today’s debate. I had seen the report of the EU sub-committee chaired by the noble Lord, Lord Harrison, and agreed with its balanced view and recommendations. I also agreed with the Government’s response to that report. Then I noticed, as the noble Lord, Lord Harrison, has already pointed out, that the noble Lord has cleverly timed this debate to coincide with the expected announcement of the EU Commission’s latest regulatory onslaught on credit rating agencies. So here I am.

I start from the position that we have to push back at the relentless tide of regulation from Europe and that any more regulation has to have the highest level of justification. I also believe we should make a start on returning powers to the UK, but stopping further regulation from Europe is not a bad place to start.

Looked at dispassionately, it is not clear that the rating agencies deserve the degree of punishment that has been meted out to them in the wake of the global financial crisis. Both Europe and the G20 needed scapegoats to cover up the fact that neither Governments nor their regulatory and prudential agencies had the faintest idea of the financial mayhem that was stalking the world in 2007. So the credit rating agencies, which certainly did not cover themselves in glory in relation to structured financial products in that period, ended up subject to a range of regulatory interventions and technical standards.

As is well known, the European Commission has never intended to let the financial crisis go to waste. The noble Lord, Lord Harrison, and I attended a breakfast briefing last week where a senior member of the Commission’s staff positively bragged that the crisis had led to 29 pieces of legislation affecting the financial services sector. His justification for this onslaught was, to say the least, minimal, but he evidently relished the opportunity to increase the regulatory reach of Brussels, and credit rating agencies have been caught up in this Commission land grab.

As the noble Lord, Lord Harrison, has noted, the Commission now wants to ratchet up the regulatory pressure on the rating agencies even further. This appears to be retaliation for their alleged failings in relation to the stressed eurozone economies. There is no doubt that Ireland, Portugal, Greece, Spain and Italy have not enjoyed having their credit ratings reduced—the reductions were late and sudden—but those countries had to face up to the fact that their credit ratings had been overstated for too long.

I completely agree with the report of the sub-committee chaired by the noble Lord, Lord Harrison, that the credit rating agencies did not precipitate or exacerbate the euro area crisis. I also agree that they did a rather bad job of not identifying the real risks in those economies. However, this is not a sufficient excuse for additional regulation.

It took me rather a long time today to confirm whether Commissioner Barnier did in fact launch his latest round of regulatory assault on the credit rating agencies. In fact, one blog this afternoon reported that Commissioner Barnier himself had been downgraded from “punctual” to “tardy” because he was late for the relevant press conference. However, a couple of hours ago I managed to track down a one-page summary of the proposals.

As the noble Lord, Lord Harrison, has noted, one of the things being mooted as part of the proposals is one which would allow credit rating agencies to be silenced if a country was in some kind of crisis intervention. That idea should have been killed at birth and never taken into the heart of EU policy-making. Constraining the credit rating agencies from placing their sovereign debt evaluations in the market is contrary to free speech. It is also impractical because the rating agencies would presumably have to declare that they were unable to issue a rating, which could well trigger a panicked response in the sovereign debt markets. The creation of an information void—or, at least, one with only government-controlled information—is likely to have the worst possible effect on credit markets. Fortunately, the Commission has stepped back from the brink on this and the matter is now marked, in the summary that I saw, as “for further consideration”. I hope that that means that the proposal is gone for good, but we have yet to see.

A dodgy proposal that has survived is that of compulsory rotation of rating agencies every three years or every 10 issues. I share the view of the committee and the Government that greater competition in the rating agency market would be a good thing, but there are problems with the rotation proposals. First, as most issuers already use more than one agency, the impact of the rotation proposal is huge turbulence in what is a very small market. It might well give the smaller agencies an opportunity to improve their position, but does that end actually justify the means? Creating further competition through turbulence has no respectable precedent.

Secondly, there are likely to be real impacts. Certainly, issuers will be faced with varying increased internal costs in dealing with additional rating agencies, possibly annually if they do a lot of issues. More importantly, it is far from clear that the markets which look to credit agencies will accept any new players at face value. Disruption in corporate credit markets, and through that disruption in the real economy, may be the only certain result of these proposals. It is not surprising that the Association of Corporate Treasurers is deeply concerned about these proposals and it wrote to the Commission in clear terms recently. It was disappointing and unsurprising in equal measure that Commissioner Barnier’s spokesman dismissed the association’s views as “a typical lobbying move” that “smacks of desperation”.

A further bad idea is the proposal to create a European framework for civil liability. The sub-committee chaired by the noble Lord, Lord Harrison, had it right when it said that civil liability is best left to member states. It is clear that S&P’s foolish error last week on the rating of France has touched a raw nerve, and has strengthened the resolve of those at the heart of the European project to control and punish credit rating agencies. But anybody who has looked at France’s economic position might marvel that it has hitherto escaped the analytical stringency applied to others in the eurozone. Credit spreads are now telling their own story on France. The mistake was unfortunate, but do we want a credit rating sector terrified of making a mistake, or one which is not prepared to boldly challenge received wisdom? What the markets want and what, for example, France might want, may not coincide. I have not had time to look in detail at the Commission’s proposals in this area, but I hope that they do not live up to the rhetoric of punishing mistakes that was being bandied about last week.

The only good aspect of the latest proposals is that the Commission has dropped the barmy idea of establishing the European credit rating foundation, which the noble Lord, Lord Harrison, has referred to. I understand from the press that there is now a suggestion in Brussels that another non-credit rating agency approach might be adopted, possibly using, for example, the European Court of Auditors. Will the Minister say whether the Government will give any support to an EU move to take credit rating agencies out of sovereign debt ratings? More generally, will my noble friend say whether these new proposals from the Commission will be subject to the UK’s veto, or can they be bulldozed through by qualified majority voting?

The Government’s official response to the committee’s report agreed with the committee that further changes should take effect only once the existing raft of changes had had time to bed in. Will my noble friend confirm that the Government will stick to that position?