European authority critiques credit rating agencies, shoots messenger

By Joe Vladeck

The European Securities and Markets Authority (ESMA) has sharply criticized credit ratings agencies for downgrading the sovereign debt of European nations. 

The effect of sovereign debt downgrades "can be significant," said ESMA chief Steven Maijoor. Some observers have suggested that the downgrades made the ongoing European financial crisis worse than it otherwise would have been. Among other critiques, ESMA suggested that the ratings agencies were compromised by interest conflicts and did not act independently.

As Bloomberg's Matt Levine points out, ESMA's criticism is puzzling. In the private-sector, private bond issuers pay ratings agencies to issue ratings, creating incentives for ratings agencies to give bonds high ratings (in the hopes of securing more business in the future). But sovereign debt issuers don't pay ratings agencies to issue bond ratings. ESMA contorts itself to describe the conflict in different terms, but ends up with accusations that are, in Levine's words, "pretty weird." While credit agencies have rightfully taken a share of the blame for the global financial crisis, this particular critique seems misplaced.