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European leaders criticize credit-rating agencies

NEW YORK — The downgrading of European debt is turning up the heat on the firms that issue the ratings.

Some European officials are calling for curbs on rating agencies like Standard & Poor's, Moody's and Fitch Ratings. They argue that conflicts of interest and bad information make the agencies' assessments unreliable, even dangerous.

Germany's foreign minister, Guido Westerwelle, went so far Thursday as to suggest that the European Union should create its own rating agency. He spoke after downgrades of Greece and Portugal roiled financial markets and stoked fears that Europe's debt crisis was spreading.

How ratings agencies are paid is also coming under scrutiny. The money they earn comes from the institutions whose products and debt they rate — a point of contention in both the United States and Europe. At a hearing last week on the agencies' role in the financial crisis, U.S. Sen. Carl Levin, D-Mich., called that pay system an "inherent conflict of interest."

Legislation in Congress to overhaul the financial regulatory system could change how the rating agencies do business. Critics note that the agencies gave safe ratings to high-risk U.S. mortgage investments that later imploded, triggering the financial crisis and a deep recession.

The high profits and outsized influence of the rating firms have rankled European governments.

Westerwelle on Thursday told WAZ newspaper group that the EU "should counter the work of rating agencies with efforts of its own." He cited the potential conflict of interest of having the rating firms develop, sell and rate financial products all at the same time.

Westerwelle's comments came two days after S&P cut Greece's sovereign debt to "junk" status and dropped Portugal's down two notches. Those downgrades sent financial markets from London to Hong Kong plunging. Investors feared that more European countries would be dragged into the region's debt debacle.

"We should not make the welfare of Europe dependent on rating agencies," Peter Bofinger of the German government's independent economic advisory panel told Welt newspaper. He noted the agencies' failure to spot problems before the financial crisis.

A downgrade from S&P or Moody's might not tell investors anything they don't already know. But it can force a central bank or investment fund to shed the downgraded investment. That's why it can roil financial markets.

"Who is Standard & Poor's, anyway?" EU spokesman Amadeu Altafaj Tardio said Wednesday. He said the agency should better assess "realities on the ground," such as financial rescue talks in Athens "that are making rapid and solid progress."

S&P said it's confident in how it rates countries' creditworthiness.

"Our sovereign ratings generally have performed as expected, and we continue to call them as we see them when credit quality changes," spokesman Chris Atkins said.

He said S&P improved the quality and transparency of its ratings after the U.S. mortgage meltdown. Analysts now receive more training and are rotated regularly among countries so as not to become beholden to one country's interests.

Spokesmen for Moody's and Fitch declined to comment.

Help for Greece on the way

European and German officials assured markets they were working quickly on approving a bailout for Greece as they try to keep the country's debt crisis from dragging others into a continentwide financial meltdown. Olli Rehn, European Union monetary affairs commissioner, said Thursday he was "confident the talks will be concluded in the next days." German Chancellor Angela Merkel, who has pushed for strict conditions on help for Greece, said that "Germany will help as soon as the preconditions for that are there." Greece says it needs a bailout to pay $6.4 billion in bonds due May 19.

European leaders criticize credit-rating agencies 04/29/10 [Last modified: Thursday, April 29, 2010 10:04pm]
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