EU markets commissioner Michel Barnier today presented new curbs on international credit rating agencies that have come under sharp criticism in Europe's sovereign debt crisis.
However, the commissioner had to back down plans to allow the temporary suspension of ratings for countries under EU-IMF bailout programmes.
"I considered that more time was needed to detail the technical measures as they would apply," Barnier said after sources cited deep disagreement within the 27-strong European Commission executive in the hours before a delayed press conference.
The Frenchman has frequently fallen foul of London, home to four-fifths of the EU's financial services industry, for what big investors there have claimed is a campaign to weaken the City's grip. The ratings industry is dominated by Moody's, Standard & Poor's and Fitch.
Many commentators have blamed these and other rating agencies for having helped create the 2008 global financial crisis by failing to properly evaluate the risk of US mortgage investments before the bubble burst.
The new proposals would enable any EU state or investor to demand damages before a civil court for losses liable to a credit rating agency. The proposals will also seek to whittle away the role of the agencies by urging banks and other financial institutions to do their own credit rating homework rather than systematically calling on the agencies.
Barnier told French television yesterday that ratings agencies regulated by the European Securities and Markets Authority (ESMA), "won't have the right, if ESMA decides, to rate certain countries for a certain time that are receiving an international support programme from the IMF or European Union."
Greece, Ireland and Portugal all suffered rating downgrades that accelerated unsustainable rises in their borrowing costs over the past two years, with Spain and Italy - which has opened its books to international auditors - also coming under pressure in recent days.
But the commissioner said of the disappearance of the ratings suspension from the final legislative proposal that now will be put to EU states and European Parliament lawmakers: "We are going to take the time to come back on this question."
He said his idea was "innovative, perhaps too innovative," but invited the EU parliament, where he was speaking, to resurrect its spirit during deliberations.
The former French cabinet minister said he was also leaving for a later date an end to the practice whereby clients, companies as well as governments, pay rating agencies for advance notice on their own credit worthiness.
Barnier said some of the ideas he would still like included were "inspired" by last week's erroneous downgrading of France by Standard and Poor's, which cited a technical error.
France, which economists say is struggling to hold onto its AAA rating alongside the stronger euro zone economies of Germany, the Netherlands, Austria, Finland and Luxembourg, recently announced deep budget cuts in a bid to retain its top status.
The other big idea EU colleagues had suggested when he first began drawing up these plans last year - to create Europe's own rating agency - was ruled out on the grounds it would cost €300m to set up and would face accusations it was both "judge and jury."
ESMA, which has registered a couple of dozen ratings firms to date, can already withdraw a company's licence, order criminal action or slap fines amounting to up to 20% of annual takings.
EU votes to bad naked credit default swaps
The European parliament voted today to ban "naked" credit default swaps, a controversial financial instrument used by traders to bet on the risk of a country failing to pay off debt.
"For the first time, Europe will ban a financial product used to speculate on a country's debt," Green group lawmaker Pascal Canfin, a leading negotiator for the legislation, told the parliament before the vote.
Naked CDS instruments will be prohibited in the 27-nation European Union from December 1 under the rules adopted by an overwhelming majority, with 507 of 641 lawmakers present voting in favour. The lawmakers also backed restrictions on the practice of short-selling company stocks.
The parliament reached a deal with EU governments last month after long negotiations on banning naked CDS, the highly speculative instrument partly blamed for exacerbating Europe's debt crisis.
A CDS serves as an insurance against the risk of default by a company or a government. In a "naked" CDS, the investors do not own the debt, betting they can purchase it later at a cheaper price if a default occurs.
Critics say "naked" CDS allow markets to speculate on a government's chances of defaulting - something Greece has struggled to fend off since May 2010 - driving up pressure on countries.
