JANUARY 17, 2012, 4:36 A.M. ET.The Real Ratings Threat to Europe . By RICHARD BARLEY

Beware unintended consequences. The European Commission wants to force bond issuers to rotate ratings firms—a move that may damage the €700 billion ($886.7 billion) nonfinancial corporate bond market just when Europe needs it most. Standard & Poor's sovereign downgrades will no doubt increase the political desire for harsher regulation, but this proposal is flawed.

The commission is seeking to address a longstanding criticism of ratings firms: that they have a conflict of interest because they are paid for by the issuers. It proposes a company with two ratings drops one after three years or when it has issued 10 rated debt instruments and the other after six years. Ratings firms would then have to wait four years before they can rate the issuer again. The commission says this will "reduce the familiarity threat to CRA (credit rating agency) independence resulting from a long business relationship" and increase competition.

Both issuers and investors fear the plans, which weren't part of 2011's consultation process, will prove counterproductive. The new rules could encourage raters to go soft on issuers in the hope of being retained as long as possible, leading to rating inflation. The new rules could also push up corporate borrowing costs as the market may be unwilling to rely on unfamiliar rating companies with little track record. Nor will the new rules necessarily boost competition: Fitch has struggled for years to break into the corporate ratings market dominated by Moody's and Standard & Poor's. Will new entrants invest in research if they cannot hang on to clients?

Indeed, rotation will make it harder to track the long-term performance of ratings firms, reckons the U.K. Association of Corporate Treasurers. Even in traditionally skeptical France, the Af2i investor group, whose members have €1.4 trillion of assets under management, has criticized the proposal, arguing the quality of a rating depends on an analyst's familiarity with the issuer.

Governments appear to have realized the dangers, and exempted their own bonds from the rules. With bank lending set to contract and bond markets likely to become an even more vital funding source for European companies, policy makers should think again.

I think its a good idea.

Credit rating agencies do not downgrade companies promptly enough, because the are clients. For example, Enron's rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company's problems for months.

If they had to change rating agencies every 4 years, I believe it would be easier to spot problems.

EU_Army wrote:

I think its a good idea.

Credit rating agencies do not downgrade companies promptly enough, because the are clients. For example, Enron's rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company's problems for months.

If they had to change rating agencies every 4 years, I believe it would be easier to spot problems.

nothing is perfect and sometimes shenanigans are afoot.... welcome to the real world

what theyre proposing though will not fly

There were no complaints when france et al were at AAA.