UPDATE 1-ECB pressed to do sovereign ratings itself -report
* Finance ministers want ECB to rate sovereign debt-source
* Would eliminate dependency from rating agencies
* ECB's Nowotny said central banks could do it better
(Adds details, background, reaction)
FRANKFURT, March 3 (Reuters) - European Union finance ministers are pushing the European Central Bank to develop its own rating system for euro zone countries, German business daily Handelsblatt reported on Wednesday, citing EU finance ministry sources.
The paper quoted one official saying the plan would free the euro zone from its dependency on international rating agencies such as Standard & Poors, Moody's and Fitch.
"The agencies have been completely wrong in the case of Lehman. Who can be sure that they won't be wrong again," said the source, described as being from the Ecofin group of finance ministers.
European Commission spokesman Amadeu Altafaj said he had no comment at this stage on the Handelsblatt story.
The ECB also declined to comment on the report, a day after ECB Governing Council member Ewald Nowotny criticised the power wielded by ratings agencies and said central banks could better judge a country's economic performance.
Greece's recent debt troubles have highlighted problems in the system under which the ECB accepts bonds as security for loans based on the judgment of major ratings agencies -- currently at least one agency must rate bonds BBB-, but the threshold is due to go back to A- at year end.
Fitch and S&P have downgraded Greece into 'B' territory and should Moody's follow suit, banks would no longer be able to exchange Greek government debt for cash in ECB refinancing operations from January 2011.
Nowotny said on Tuesday Europeans had never been able to agree on setting up a local alternative to the big ratings agencies, but it would be good to escape from dependence on their judgement.
"The fate of Greece, and if you are going to be more dramatic, the fate of Europe, depends on the judgement of one rating agency. That is an unacceptable situation," he said, adding that sanctions from ratings agencies were "bigger than God's."
"The problem is that they are like a black box. A central bank can better judge the economic developments of a country than three people sitting in an office in New York."
Nowotny heads the Austrian central bank, one of four national central banks who already prepare internal assessments of some debt submitted as collateral.
THREAT TO INDEPENDENCE?
Analysts said such a move would open the door to extreme political pressure on the ECB, although it would be very convenient to resolve a potential stand-off over Greek debt.
"The ECB has said it would not change the rules for one country, but it can change the rules for all countries at the same time," Nomura economist Laurent Bilke said.
"The flipside of this would be that governments are going to be very interested in the position of the ECB is. There is one element I am not very comfortable with, and that is that the ECB is an authority controlling what national authorities are doing and whether they comply with European rules."
"I think independence should work both directions -- it would not like the governments to assess what it does in terms of monetary policy and to deliver price stability."
The ECB already accepts ratings prepared by national central banks' in-house credit assessment systems in some circumstances where no external rating is available, for example for non-traded assets like packages of loans.
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