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First European Rating Agency on the Way

Standard & Poor’s, Moody’s and all the other kids, that is the American rating agencies are about to get a European rival. German corporate consulting firm Roland Berger developed a plan to challenge the dominance of American firms that have thrown quite some euro zone member countries into deep red by downgrading them and forcing them into the arms of bailout. However Roland Berger needs to raise a start-up capital of 300 million euro. Financial Times Deutschland expressed doubts on whether the European rating agency will manage to raise the necessary budget aas there is  allegedly lack of interest from the side of investors.

Dearth of Investors -Plan to Set Up European Rating Agency Under Threat

The project to set up a European rating agency to challenge the dominance of American firms is at risk of collapsing, the German business daily Financial Times Deutschland reported on Monday. International consulting firm Roland Berger can’t find enough investors for its plan, the report said. But it hasn’t completely given up hope.

The reputation of credit rating agencies has plummeted in recent years. First, market leaders Moody’s, Standard & Poor’s and Fitch assigned top grades to scores of securities that ended up plunging the world into its worst financial crisis in decades. Then, during the ensuing debt crisis, the agencies worsened the plight of ailing euro member states with downgrades that in the eyes of many politicians were unwarranted.

Their fury at the rating agencies prompted politicians to devise plans to set up a European rating agency to challenge the dominance of the US firms. German corporate consulting firm Roland Berger developed a plan and the European Internal Markets Commissioner, Michel Barnier, came up with a corresponding draft law. But the efforts appear to have been in vain. According to a report in Financial Times Deutschland on Monday, the project may be abandoned.

The newspaper reported that Roland Berger no longer expects to be able to raise the €300 million ($390 million) in start-up capital required for the project. Berger had pinned its hope on support mainly from big German and French banks but has met with little interest so far. Many potential investors doubted whether the investment model could work.

The Federation of German Industry (BDI) also has its doubts about a European ratings agency. The association submitted a paper in Brussels describing the oligopoly of rating agencies as “natural.” The EU proposals, it added, could “strongly inhibit” the functioning of the ratings market. (Further reading Spiegel Online /English)

PS How about a crowd-funding project supported by austerity-hit, debt-ridden and IMF-plagued Europeans? KTG would gladly donate 100 euro…

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  1. I agree with the BDI. The structural problem lies in all kind of laws and regulations that have given rating agencies the power they have and are abusing. For example: when the agencies mark a certain bond below A (I can’t remember the correct level at the moment) the ECB is not allowed to use it as collateral anymore. Same goes for a lot of other big investors like pension funds. They all have to dump the bonds and that has happened the past years. But there is no god given 10 commandments that says “Thou Shalt Not Owed Bonds Below Double A”. It’s a rule governments have implemented and can revoke.
    By creating a European Rating Agency you create another monster that lives off the same crazy rules.