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Ratings Agency Reform: Something More Radical Required?

From the IIEA website:

Ratings agencies are not popular in Europe today. As Standard and Poor’s warn the whole Eurozone that they may be about to be downgraded, European politicians have been retaliating with strong language and with new regulations for the ratings agency industry. I will write a follow-up post on the European Commission’s new package of reforms for the way ratings are issued and used. Here I’d like to focus on the criticisms that European officials and politicians have levelled at the industry.

Given the well-known incentive problems associated with the so-called issuer-pays model, there is a general agreement that credit ratings agencies tend to be positively biased in their assessments of credit risks. However, over the past year, it has become clear that many senior European politicians and bureaucrats believe that the agencies are being far too negative in their assessment of the risks associated with Euro area sovereign debt.

A brief but representative sample can help provide a general idea of the thinking of the European policy elite.



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