FN: Five reasons against 'banning' sovereign ratings

21 October 2011

The European Commission is actively considering allowing the region's financial regulator to ban the issuing of sovereign credit ratings in the region for countries in bailout talks.

Market confidence in these countries could disappear

Investors seemed relatively unconcerned with the Spanish downgrade by Moody's on Tuesday as shown by its CDS price barely moving upon the news and the IBEX 35, the benchmark for Madrid's leading stocks, only falling by just over 1 per cent overnight. But should investors be made to take a blind bet, they may not be so willing.

Asset managers would have to reassess their portfolios

Ratings of bonds by a recognised agency are essential to many fund managers – so any move to restrict a ratings change could mean they will be forced to remove that bond from their portfolios.

Impact on banks

Investment banks that have to shore up their balance sheet in preparation for banking stress tests and Basel III regulations could be made to drop all non-rated debt – even if it was issued by a sovereign, as it may not count towards its asset buffer

Countries could find it impossible to borrow

Countries affected by the potential ratings freeze would have their credit history severely impacted – as anyone who has tried to get credit without a reference would know.

Legal wranglings

National financial regulators, politicians, trade unions and many other stakeholders in the affected countries would no doubt want to voice their thoughts over the decision and what, how and when it could be done.

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