EU Considering Ratings Agency Fines

March 11, 2011 by · Leave a Comment
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Finance ministers from the European Union (EU) are considering penalties for ratings agencies that assess members’ sovereign debt inappropriately harshly.

Didier Reynders, Belgium’s finance minister, said, “It must be possible to penalize, if after some weeks or months it is possible to say it [a downgrade] was a wrong signal, what is the responsibility of the rating agency? It is quite difficult to say that there is no responsibility if it is possible to prove it was a wrong analysis, a wrong signal. The penalties are the capacity to impose some responsibility on the rating agencies.”

There is an increasing level of frustration with the rating agencies among the EU nations. The general feeling is that ratings agencies are outside the area of reasonable responsibility and their opinions do not encompass all the factors that help to mitigate sovereign debt risk. Yet a seemingly arbitrary downgrade can have devastating effects on nations’ cost to borrow and consequently their national budgets.

How to determine whether agency rating was “wrong” and the appropriate penalties are still open questions.

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