Credit Rating Agencies: new crisis, same old story? - Fitzgerald
Press Statement from Frances Fitzgerald MEP
Monday 11th May 2020
Credit Rating Agencies: new crisis, same old story?
Fitzgerald calls on the European Commission to revisit regulation of CRAs
Frances Fitzgerald, MEP and member of the European Parliament's Economic and Monetary Affairs Committee, today (Monday) called on the European Commission to examine the role of Credit Rating Agencies in the Coronavirus crisis following a recent surge of rating downgrades for companies and countries since the onset of the Coronavirus.
“Credit rating agencies have been quick to slash ratings for many vulnerable businesses and sovereign countries since lockdowns were imposed. It has been estimated that March 2020 saw the fastest pace of rating downgrades on record since at least 2002, according to research by Bank of America”, said Ms. Fitzgerald.
“Aggressive downgrading during a crisis is a recipe for financial chaos. Lessons must be learned from the last financial crisis whereby credit ratings agencies had set over-optimistic ratings for many companies, financial products and sovereign bonds, which in turn had to be downgraded rapidly after the collapse of Lehman Brothers.
“Unfortunately, it seems that this is almost a rerun of the 2008 financial crisis. There is a clear procyclical element to the current downward trend in ratings. Following the financial crisis, the EU and the US directly regulated credit rating agencies in order to prevent a repeat of mistakes. But it seems that the EU regulation may not be effective enough given the current wave of downgrades.
“I have written to the European Commission to ask for an examination into the role of credit rating agencies in the Coronavirus crisis and to consider revising the EU’s regulation of the sector.
“There are still structural problems with the rating sector. Issuers can still pay to be rated - this may affect objectivity of ratings. Additionally, the practice of ‘ratings shopping’, whereby issuers shop around to see which agency is willing to give their bonds the highest rating, still needs to be tackled effectively.
“Last week saw Fitch cut Italy’s credit rating to just above junk status (BBB-) - a massive blow to a country that has suffered so deeply from this virus. Downgrading a country in the midst of a crisis simply serves to increase the cost of their borrowing, thus putting them into further financial difficulty.
“We experienced this type of quick-fire downgrades during the financial crisis in Ireland when we received a series of cuts to our credit rating in 2010. This exacerbated our financial difficulties and brought us a step closer to bailout.
“Credit rating agencies can perform an effective role in the financial system but when we get this kind of procyclicality, serious questions must be raised about their role and responsibility. We cannot expect rating agencies to be able to see into the future with a crystal ball. But equally we should not allow rating agencies yet again to unleash panic in the financial markets.”
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