September 28, 2010 / 5:20 PM / 9 years ago

EU to consider penalties for rating agencies: minister

BRUSSELS (Reuters) - EU finance ministers will discuss this week how they might penalize rating agencies that pass inappropriately harsh judgment on countries, a senior EU politician said on Tuesday.

Didier Reynders, the finance minister of acting EU president Belgium, said the bloc’s economy chiefs would discuss such a regime when they gather this week to discuss the agencies, whose downgrades of countries at key moments in Europe’s debt crisis angered some politicians.

Building on remarks that he wants a new EU markets watchdog to be able to fine rating agencies, Reynders said: “It must be possible to penalize. If after some weeks or months it is possible to say it (a downgrade) was a wrong signal, what is the responsibility of the rating agency?”

“It is quite difficult to say that there is no responsibility if it is possible to prove it was a wrong analysis, a wrong signal. The penalties is the capacity to impose some responsibility on the rating agencies.”

Reynders’ comments illustrate growing frustration with the agencies but leave many questions unanswered about how such a penalty scheme would work or whether it would win the backing of European countries and the parliament.

It is not clear who would decide whether an agency rating was “wrong.”

Sharon Bowles, the chairwoman of the European parliament’s influential economic affairs committee, was critical of the idea. “You cannot penalize rating agencies for getting their predictions wrong,” she told Reuters.

The EU’s finance ministers are acutely sensitive to the danger of further downgrades, such as one recently threatened by Standard & Poor’s for Ireland as the cost of supporting Anglo Irish Bank rises.

Representatives of the three big agencies — Standard & Poor’s, Moody’s and Fitch — have been summoned to a meeting of finance ministers this Friday in Brussels to defend the way they take rating decisions.

Some in this group, including Germany’s Wolfgang Schaeuble and France’s Christine Lagarde, have also found it hard to forgive an S&P decision to demote Greece to junk status, which aggravated their attempts to mount a rescue.

BANK TAX MENU

Reynders also signaled that he did not expect European finance ministers to agree a single approach to taxing banks and that it was possible the bloc’s 27 countries would instead be given a choice of approaches.

“Maybe with a menu, it’s possible to have some different tools,” he said.

Leaders of the world’s Group of 20 top economies (G20) abandoned attempts earlier this year to reach a common approach on taxing banks. While Europe still aspires to lead with its own model, widespread disagreement remain about how levies should be imposed and how the money should be spent.

Austrian finance minister Josef Proell will again push for a tax on financial transactions at the meeting this week. But such a scheme, which would tax deals such as share trading, is seen as having only a slim chances of being passed.

At a meeting of industry and policy makers hosted by think tank Eurofi, European Commission President Jose Manuel Barroso, who has also criticized rating agencies, hailed the recent creation of pan-European watchdogs as a “gold standard.”

The head of the EU executive, which writes the first draft of all European laws, promised more reforms by the start of next year. A blueprint to shake up rating agencies will be among them.

The EU efforts are part of a wider, global push to dilute the role of credit rating agencies in the financial system, particularly in how their ratings have been used to determine how much capital a bank must set aside.

The Financial Stability Board of global regulators and central bankers will make recommendations next month to the Group of 20 leading finance ministers to reduce reliance on ratings and reduce the “cliff effects” of a downgrade on investor confidence.

Sony Kapoor, a financial expert with London think tank Re-define, said fines on rating agencies would be in keeping with a similarly tough approach in Washington.

“The U.S. laws already provide for the withdrawal of registration or of private legal action against a rating agency. So fining rating agencies to hold them responsible is not out of the ordinary.”

Editing by Patrick Graham and Hugh Lawson

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