The European Commission today called for tighter control of credit ratings agencies that have been criticised over their role in the debt crisis that rocked the euro.
Greece, Portugal and Spain were hit by devastating credit downgrades this year owing to their high public deficits and debts, highlighting the strong influence ratings agencies have on investors that buy sovereign bonds.
The European Union's executive arm wants to improve the transparency of agencies, prevent conflicts of interest and increase competition in a sector dominated by Moody's, Fitch and Standard & Poor's.
Under a set of proposals unveiled by the commission, agencies could be required to warn governments three days in advance of making a credit score public in order to allow the country to point out any errors in the report. The agencies give governments 12 hours notice before issuing a rating.
EU countries could also be exempted from paying for the services of credit rating agencies in order to avoid any conflicts of interest, the commission said in a document launching public consultations on the issue.
'It is clear that sovereign debt ratings play a crucial role for the rated countries, since a downgrading has the immediate effect of making a country's borrowing more expensive,' the commission said.
Investors rely heavily on credit scores to decide whether to buy or ditch debt issued by governments. A sudden downgrade can therefore spark a selloff that drives up a country's borrowing costs or even make it too expensive for a country to raise funds through the bond market.
The commission noted that credit rating agencies have been criticised for 'having overreacted in the downgrading actions, without for instance taking due account of supportive measures of the euro zone Member States'.
The commission said it would decide on the need of any measures next year following a two-month period of consultation.
