Haphazard timing of downgrade announcements by the leading ratings agencies are threatening already fragile government bond markets in Europe, a senior Spanish official said on Friday.
Soledad Nunez, director of treasury policy at the finance ministry in Madrid, did not dispute the substance of downgrades from Moody’s, Standard & Poor’s and Fitch that have depressed demand for debt issued by Spain and other Eurozone countries in recent months. She did urge the agencies to release their bad news with greater care.
A recent downgrade of Italy’s sovereign debt was announced two hours before a Spanish bond auction, creating an “absolutely dangerous” situation, she recalled. Spain’s own credit was shifted down a notch at a time when it had just finished a bond syndication but buyers had not settled their purchases. That threatened unraveling the whole deal, Nunez said. “The agencies have to understand that their actions have effects,” Nunez told a seminar organized by the International Institute of Finance in Washington.
She offered a “very modest proposal” to schedule downgrade announcements for Fridays after securities markets close, giving investors time to digest the news before making trading decisions. Paul Coughlin, head of corporate and government ratings at S&P, flatly rejected the idea. “At the end of the day we serve investors, not issuers,” he rejoined. Coordinating timing of an announcement with an issuer would raise “real questions of conflict of interest.”
Coughlin offered a spirited defense of his agency’s record on sovereign credit. “Our ratings have been more forward-looking than the market has been, particularly in the Eurozone,” he asserted. S&P first downgraded Greece from A+ to A in 2004, Coughlin recalled. Investors only started demanding significantly higher yields to buy Greek government bonds three years later.
The agency was similarly ahead of the curve on Italy, Ireland and other now-troubled national credits, he maintained. “I have yet to meet a customer who has welcomed a downgrade,” Coughlin quipped, deflecting criticism that the agencies may be too harsh on Eurozone states at the moment.
Richard Cantor, chief risk officer at Moody’s, sounded a more contrite note about the rating agencies’ work before the 2008 financial crisis. The agencies endured heavy criticism for failing to detect weakness in U.S. mortgage-backed securities and the banks that were using heavy leverage to load up on them. “We were lulled into a bit of complacency about where the risks lay,” Cantor admitted. “We are not immune to trends in perception.”
Coughlin conceded that “people regarded our rating process as something of a black box,” and said S&P was moving to offer more “transparency and comparability” about how it reaches its all-important conclusions.
Transparency may in fact be thrust upon the ratings agencies by regulators, said Peter Kerstens, economics counselor for the European Union’s delegation to the U.S. government. The EU sees “sovereign debt as a specific category, and the rigor of the ratings must be adapted to it,” he warned. Eurocrats are currently working on requirements that sovereign raters “publish their methodologies and let regulators scrutinize that methodology,” he said.
This is just one of five areas of new oversight for ratings agencies that the European Commission should start to consider by the end of this year, Kerstens noted. Also included in the package are proposals that agencies incur “civil liability” for decisions reached with undue care. “If an opinion is reached with demonstrable negligence, ther is no reason that the agency should not be held liable,” he asserted.
But in response to a question from the floor, Kerstens siad the EU would not require ratings agencies to raise capital as a cushion against potential legal judgments for negligence. “That would be going too far,” he said.
