Credit rating agency faces government's challenge

Credit-ratings companies may be forced to disclose the internal analyses they use when they decide to cut a European Union government’s rating, the region’s financial services commissioner said.

Nations may win the right to check the data used by the companies in advance of downgrades of their sovereign ratings. The battle derived from Moody’s Investors Service’s cut of Portugal’s credit rating by four levels last week, prompting criticism from the EU that ratings companies are unnecessarily exacerbating the region’s sovereign-debt crisis. European Commission President Jose Barroso, who is a portuguese, said he “deeply” regretted the timing and magnitude of the downgrade and said proposals for increasing regulation of the rating companies in Europe would come out this year.

The governing body is considering introducing requirements which would allow a government to check the accuracy of the data used by an agency in advance of any downgrading. The proposals may also include measures for investors to take ratings companies to court when there has been negligence or violation of applicable rules. They want more competition and diversity in this business.

On the other side, governments shouldn’t abuse the ability to check the data used by ratings firms by attempting to delay downgrades to their sovereign rating. It is human nature that governments whose ratings are downgraded are often too ready to shoot the messenger rather than tackle their debt problems.