Credit rating agencies' freedom of expression should be restricted on "prevention of disorder" grounds, the European Commission will argue on Tuesday as it unveils controversial proposals to suspend sovereign ratings in "exceptional circumstances."
The reform package marks the most aggressive attempt yet by Brussels to bridle an unpopular industry that some European leaders have blamed for aggravating the sovereign debt crisis with erratic and "subjective" rating decisions.
However, even at this late stage, there still remain big divisions within the Commission over how powers to suspend sovereign ratings will be defined – a political disagreement EU commissioners must resolve on Tuesday morning.
Michel Barnier, the commissioner responsible for the proposal, is mounting a last-ditch attempt to increase the clout of regulators so that they can suspend any sovereign rating within the EU – a broad scope that applies to countries such as France and Italy in prescribed circumstances.
But Mr. Barnier, a former French foreign minister, on Monday faced a backlash from at least five other European Union commissioners – including representatives from the U.K. and Sweden – who are concerned that such restrictions could backfire and damage fundamental rights.
A draft of the Commission impact assessment, seen by the Financial Times, justifies the curbs on freedom of speech as a legal measure to avoid public disorder.
"One could argue that this option restricts, to some extent, the freedom of expression or information … of credit rating agencies. However, limitations to this are possible," the impact assessment argues.
"The exercise of the freedom of expression carries with it duties and responsibilities and may be subject to restrictions prescribed by law necessary for, inter alia, the prevention of disorder."
Some officials familiar with the negotiations expect a compromise to emerge where ESMA, the European regulator of credit rating agencies, would only be able to ban ratings if countries were still negotiating bailout programs.
Even this more tightly prescribed power is vehemently opposed by rating agencies and many big investors, who argue the measure will distort market behaviour and accelerate a selloff in a country's debt.
Other observers argue suspending ratings would be impractical, as the EU would find it difficult to stop U.S.-based analysts offering their opinion on sovereign ratings, which are often a key component of corporate ratings.
Paris has long championed a tough clampdown on rating agencies, a position reinforced last week by the fury over Standard & Poor's mistakenly signalling that it was preparing to downgrade France's cherished triple A credit grade.
The EU impact report echoes some of its concerns, including rating agencies amplifying "contagious effects" though "subjective biases," and "arbitrary" downgrades that are poorly explained, triggering "significant investor over-reactions."
While some radical ideas – such as an EU rating agency – have been dropped, Brussels will propose measures that attack the business model of the big agencies and increases regulatory scrutiny of their analysis methods.
Mr. Barnier is likely to offer some minor concessions on measures to ban big rating agencies from merging and on the time-limit when issuers must change the rating agency they use.
Copyright The Financial Times Ltd. All rights reserved.