In their quest to restore financial stability in the face of declining confidence in European institutions, the Eurocrats have decided to crack down on the bearers of bad news.
The European Commission recently proposed new regulations to compel credit rating agencies to disclose their methodology and assume responsibility for any losses their ratings might cause.
The European Commission proposed new rules Tuesday to force credit rating agencies to disclose the methodologies and data they use to rate sovereign debt.
The new proposal could subject Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to European pressure, in turn suppressing information that might hurt the trading of sovereign debt.
The proposal would also let investors sue the ratings agencies for civil damages if they believe the ratings were “intentionally or grossly negligent.”
And the draft proposes to force the rating agencies to publish their ratings “after the close of business and at least one hour before the opening of trading venues in the EU,” the EU’s top market regulator said in a statement.
The New York Times reports that some of the Commission’s members pushed back partly at the urging of London. However, “the commission did agree to other measures that would increase the liability of the agencies for improper ratings, oblige issuers of debt to use a wider range of agencies and require agencies to issue ratings in a manner that was least likely to provoke volatility in the financial markets.” Other proposals included limiting changes in ratings to once in twelve months and the creation of a new European credit ratings institution.
These proposed regulations will make credit agencies think twice before expressing doubts about the solvency of a sovereign borrower.
But other countries are not so sure that shooting the messengers of doom will stop catastrophe from unfolding. Even the US is getting ready to a “worst case”. Ezra Klein at the Washington Post cites a Federal Reserve research paper which argues that a Eurozone collapse would very likely plunge the US into recession.
Meanwhile, the bigger, scarier unknown is whether financial mayhem in Europe could wreak havoc on U.S. banks. Reuters reports that the newly created Financial Stability Oversight Council is desperately trying to figure out which firms are exposed to a euro zone crisis. Indirect U.S. bank exposure to Europe could total more than $4 trillion, although it’s unclear how much of those potential losses would be limited by hedging and so forth. That $4 trillion is a worst-case scenario.
… it’s a large enough number that policymakers are racing to build up a firewall. The Federal Reserve will reportedly initiate a new round of stress tests for U.S. banks soon.
But what can be done? Even though Brad de Long says that Washington is exhorting leveraged US banks to lower their exposure to Europe it is not clear that simply shifting the risk around will help any more than re-arranging the deck chairs on the Titanic. It may reduce single points of failure, but given the size of the bomb ticking, it may not make much of a difference.
Meanwhile, we have a reminder from Hollywood that it is never good to bring bad tidings to an angry king.