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Europe assails 'bias' of ratings agencies

A demonstrator holds a banner saying "unbreathable!" during a protest against politicians, bankers and the authorities' handling of the economic crisis in Lisbon May 28, 2011.

RAFAEL MARCHANTE/REUTERS

Europe's leaders are accusing the world's largest credit-rating agencies of bias in assessing the debt of troubled countries, renewing calls for the creation of a European rating agency.

The complaints were sparked after Moody's downgraded Portugal by four notches Tuesday to "junk" status, and Standard & Poor's warned Monday it would consider it a "selective default" if banks and insurers roll over about $42-billion of Greek debt - a move that could derail efforts to restructure Greece's debt.

German Finance Minister Wolfgang Schaeuble said Wednesday he was surprised by the decision to downgrade Portugal, saying he "can't decipher" the basis for the evaluation.

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"We need to break the oligopoly of rating agencies," he told reporters in Berlin.

The comments heighten long-simmering tensions between politicians and the three leading rating agencies, whose ratings are crucial to efforts of Europe's troubled countries to ease their debt burdens. In the short run, policy makers need to keep Athens from being declared in default so Greek banks can continue to borrow from the European Central Bank.

European leaders are struggling to extend Greece's debt and win support for fiscal plans for Spain, Ireland and Portugal, while debt-rating agencies are assessing the efforts on behalf of private-sector lenders and bondholders who are being asked to participate in some of the refinancing efforts.

Mr. Schaeuble's concerns were echoed by European Commission president Jose Manuel Barroso, who criticized Moody's for downgrading Portugal so soon after it received a bailout. He said the ratings move is fuelling speculation in financial markets this week.

"It seems strange that there is not a single rating agency coming from Europe," Mr. Barroso told reporters in the European Parliament. "It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe."

European Union political leaders have talked in the past about creating a European debt-rating agency, but there is no concrete plan in place to do so.

Lawmakers have butted heads with the rating agencies throughout the debt crisis, but even earlier criticized the firms for helping spark the financial crisis in 2008 by failing to adequately assess the risks of complex financial instruments. The credit-rating firms are now facing new regulations requiring registration as well as heightened standards to control conflicts of interest.

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Those new reforms, however, have not stopped European politicians from continuing to complain that the world's biggest credit raters are primarily U.S.-based, although they have local offices in Europe.

Moody's and Standard & Poor's are U.S.-based firms, while giant Fitch Ratings Ltd. is based in London and New York and is owned by a Paris-based company.

"They feel [the rating agencies]just don't understand the process, and I don't think most people would say that's a fair criticism of the rating agencies as it relates to developed-country sovereign debt," said Mark Chandler, head of Canadian fixed-income strategy at RBC Dominion Securities. "They have a long track record on that."

Mr. Chandler said the credit raters are looking at the restructuring from the perspective of the private sector as policy makers continue to propose models to entice private banks and insurers to participate in Greece's bailout.

Ben May, European economist at Capital Economics in London, said that while the fight between European politicians and the major credit agencies has flared this week, it is not a new - or particularly dangerous - development.

"There have been comments like this seen over a prolonged period in the past," Mr. May said. "I'm not sure these are necessarily anything new, although there is an element of frustration."

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The head of Standard & Poor's in Germany, Torsten Hinrichs, defended his firm's work, telling a radio interview he rejects the criticisms of the firm's latest report on Greece.

"The assertions are completely made up out of thin air and factually wrong," he said. "They are either based on ignorance of the facts or are politically motivated comments (that) neglect the facts."

A Reuters report quoted Mr. Hinrichs saying S&P will not put 150 years of credibility on the line "to enable politically motivated push-ups" of Greece.

Moody's said it is simply aiming to provide investors with fair information.

"Moody's priority remains providing independent, objective assessments of credit risk on debt securities," a spokesman told Dow Jones.

While politicians are clearly frustrated, there appear to be few calls from the private sector for a new European-based debt rating agency.

Mr. Chandler said he has not heard of any demand in fixed-income circles for a new rating agency, and said it is hard to imagine it would have access to different information or better expertise to serve clients.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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