Friday, December 17, 2010

Europe's Muddled Ratings Thinking

by Richard Barley

Wall Street Journal

December 17, 2010

he latest warnings of possible downgrades to euro-zone sovereign debt have put the spotlight back on the role of credit-rating companies.

The European Commission's latest consultation gets one thing right: Reliance on ratings by investors or financial institutions should be reduced wherever possible. But many of the commission's other ideas, some of which may become law next year after consultation closes in January, are counter-productive.

For example, the commission wants greater competition to combat the market domination of the big three: Moody's Investors Service, Standard & Poor's and Fitch Ratings. But it is also touting the possibility of civil liability for rating companies that assign "incorrect" ratings, including where a rating is deemed to have been too low and an investor chose not to invest. That seems certain to deter new entrants to the industry, as well as implying that investors are still over-relying on ratings in making their investment decisions.


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