Sinister officials from the European Securities and Markets Authority (ESMA) have been "visiting offices" of credit ratings agencies, such as Standard & Poor's, Moody's and Fitch. Allegedly, officials are looking for "wrong-doing" and threaten to impose heavy penalties if they find anything.
An ESMA mouthpiece promised that the agency "will publish a report on the outcome of our first on-site inspections of ratings agencies. Our inspectors are examining how the rating agencies conduct their business and arrive at ratings. If we were to find wrongdoing, ESMA has the power to fine agencies, suspend their ratings and we could even withdraw their licence."
A simple question; why are these visits taking place now? Why didn't it occur to the ESMA to book these visits four years ago when Eurozone debt received high credit ratings from the agency?
Imagine for a moment, if heavily indebted Europe withdrew the license of one of the agencies, say S&P. The obvious implication is that the agency would be forced to stop operating within the EU. Presumably, the S&P could no longer supply any ratings for European bonds. Therefore, the 'AAA" countries would automatically lose their prestigious rating. That would be quite a result; the Eurozone would no longer have to worry about ratings downgrades.
Still, I suspect that the transition to a ratings-free bond market might create a few little difficulties. Since European banks are required to keep a proportion of their assets in high quality AAA paper, the sudden disappearance of a credit rating agency would be a little problematic. How could the banks differentiate between that high yielding equity tranche of subprime Las Vegas housing debt from a German government bond? At least subprime debt has a rating.
Am I missing something, but I suspect the threat to withdraw credit rating licenses isn't that credible. These friendly visits haven't discouraged the ratings agencies from threatening mass Eurozone downgrade. Today S&P announced that "we will concurrently review the 'AAA' long-term rating on the EU with the ratings on the eurozone member states."
Lets get something straight; the Eurozone is not facing a catastrophic crisis because credit agencies have downgraded its debt. The crisis stems from the massive accumulation of debt. Ratings downgrades are a symptom not a cause of this crisis. It is an obvious point, but it seems lost on the EU.