Europe's financial crisis and subsequent bank and country downgrades have cast the spotlight on credit rating agencies. MEPs complain of their excessive influence and less than perfect methodology, and are bringing in new reforms and regulations, the third set in three years. EuroparlTV goes to the world of high finance to explore the arguments. The fast and furious floor of the London Metal Exchange. This is one of the last places in the West where trading is done manually, a quaint throwback to when metals were bartered around a ring in coffee houses, but with the frantic speed and big numbers of today. Like all big financial institutions, the exchange and its investor clients are locked in to modern globalised systems, at the heart of which is a body of agencies that many in Europe believe have become too powerful. They're credit rating agencies, depended on by banks, corporations and governments the world over. But a string of recent downgrades in Europe has outraged some in the EU and led to calls for deeper regulation. It's designed to improve the quality of ratings, remove conflicts of interest, and try to prevent eurozone crisis management from being hijacked by randomly-timed downgrades. With 75% of the financial services conducted in Europe done here in the markets of London, it's not difficult to find resistance to regulation. Change is a threat to revenue and livelihood and, as many argue here, particularly damaging if rushed and poorly thought through. I think there's a big risk that this latest set of proposals could be damaging to growth. Some forecast that Europe over the next five years in the non-financial sector will need something like 1,500 billion euros. The thrust of policy-making in our view should be towards making capital markets financing easier, not more difficult. There have been no fewer than three sets of legislation to curb what many in the EU Parliament see as the undeserved influence of the big three agencies. Martin Winn speaks for Standard & Poor's, and defends their record. We don't have a political agenda. We don't advise or tell governments what they should or should not do. What we look at is the impact, in our view, of policy-making on credit-worthiness. He says the new legislation could affect recovery and growth. There is a concern that some of these measures will actually disadvantage European companies, for instance, who use credit ratings to help access much-needed funding in the capital markets. But end users, like investment manager Rob Ford at 24AM, are not so convinced. Maybe they're perhaps a bit too big and a bit too macro. Not everybody can be an expert in everything and I think that means they have made and they will continue to make mistakes. Given the crisis, there is perhaps an opportunity for someone new to come in, perhaps with some sponsorship from the regulatory authorities, and to make a difference. That brings us to the German city of Düsseldorf where finance entrepreneur Markus Krall is doing just that, setting up a new European credit rating agency to compete with the big three here in his apartment. By the end of the year Dr Krall says he'll have a credit rating agency running and based in Frankfurt, with start-up capital of 300 million euros. He's already in close contact with European ratings regulators. Ratings are created on an expert-based qualitative analytical approach. That approach is open to a lot of degrees of freedom. We propose to start ratings in principle with a mathematical, tested model and to complement that with qualitative analytics. We'll put that on an internet platform. So ratings won't be performed and published. They will be produced in public and that's a big difference. When you think about a new rating system in Europe, it's useful to observe the American experience, especially after the disastrous triple-A ratings of spurious financial products. There, many are saying not much has changed. The banks are still cosy with the agencies and they're still operating on outdated models. As in Europe, many American legislators are saying it's time for new rules. It's not, they say, about meddling in the market and stifling competition, but rather creating conditions for growth by allowing capital markets to function consistently and confidently. The critical element if we don't want further downgrades, but we want to restore trust in the ratings of the eurozone countries, is whether we will see intelligent political decision-making that shows the markets there is a way out of this crisis. That there are stormy times ahead in the eurozone no one doubts, but EU politicians are moving slowly through the crisis using the new tools at their disposal and attempting to bring those not at their disposal under tighter regulation.
EuroparlTV video ID: 1c9b08cb-3d64-4dd8-9e9a-a0c40122ba42
