European regulators may be given new powers to suspend credit ratings of countries seeking or undergoing bailouts to prevent the "negative spillover effects to other countries", according to proposals for tougher regulation issued by the European Commission.
ESMA, the European markets regulator, would be able to approve ratings methods and ban sovereign ratings in "exceptional situations" to avoid market fall out, according to draft proposals seen by the FT.
The draft reads: "In order to prevent that credit rating agencies issue sovereign ratings which do no accurately reflect the situation of the country concerned and would cause negative spillover effects to other countries, ESMA should be granted the power to temporarily restrict the issuance of credit ratings in exceptional, precisely defined situations," the draft argues.
Among other reforms sought by the European Commission it has been proposed product providers will be forced to change ratings agency at least every three years to avoid conflicts on interest and open up competition. This is used to just one year if the company rates more than 10 consecutive rated debt instruments.
Banks and corporates will also be required to obtain ratings from two agencies and fees will also be published.
Michel Barnier, internal market commissioner, supported the proposals to ban on sovereign ratings during bailout programmes at a conference in Brussels yesterday, according to Bloomberg.
"We are actively considering suspending or banning ratings" in cases where nations are making "full efforts" to implement assistance programs, he said, and the measure is likely to be included in a draft law that Barnier will present in November.
Partner Insight: Continuing the Architas education series for clients.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews