EU cautions ratings agencies over Covid-19 knee-jerk downgrades
The chair of the European Securities and Markets Authority says the ‘the timing of ratings actions needs to be carefully calibrated’
London — Credit ratings agencies should avoid deepening the coronavirus crisis by quick-fire downgrades of countries and companies as the pandemic pushes economies into recession, the EU’s securities market chief said on Thursday.
Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said the watchdog has intensified its interactions with ratings agencies to understand how they are responding to the Covid-19 crisis.
The pandemic has shut down large swathes of the European economy, with France already in recession as businesses are forced to obtain loans and furlough millions of workers to stay afloat. But central banks have said the downturns will be temporary, followed by a snap-back in economic activity once restrictions on people’s movements are lifted.
“The timing of ratings actions needs to be carefully calibrated,” Maijoor said of a sector that is dominated by just three companies, Moody’s Investors Service, S&P Global Ratings and Fitch Ratings.
Fitch cut Britain’s sovereign debt rating at the end of March, while Italy’s rating — already not too far from non-investment grade — is set to be reviewed by S&P and Moody’s in the coming month.
Lawmakers then approved direct regulation of ratings agencies by ESMA in the EU in a bid to stop a repeat of what they saw as ratings downgrades of sovereigns exacerbating the eurozone debt crisis.
There is expected to be a significant increase in downgrades given the impact of Covid-19 on the economy and the deterioration in credit quality needs to be properly reflected, Maijoor said.
“But what’s important is the timing between taking into account the increased risks of poorer credit quality and not acting procyclically, and making sure the timing of these downgrades is done in an appropriate way.” [Procyclicality is the tendency of financial variables to fluctuate around a trend during the economic cycle.]
“They need to do this independently. We cannot and should not interfere in the ratings processes themselves,” Maijoor added.
Financial markets have suffered bouts of extreme volatility in the past month, with stock indices seeing their biggest moves since Black Monday in 1987 as investors price in a recession.
Maijoor said trading platforms, clearing houses and settlement systems have performed adequately in unprecedented circumstances when most staff were working from home.
After the last financial crisis, the world’s multi-trillion-dollar, off-exchange derivatives markets were forced to clear their transactions to improve safety and transparency.
“It’s been a stress-testing of that new system and it has been working well,” Maijoor said.
There are high levels of redemptions and stress in money market funds but central bank interventions, such as injections of liquidity, limited the stress, Maijoor said. “This is clearly an issue we need to look into further, but there are no conclusions at this stage.”
A “modest” maximum of €100bn in assets at funds are subject to redemption halts and other liquidity management tools during the market stress, Maijoor said. The EU funds market totals about €15-trillion.
ESMA’s banking and insurance counterparts have asked banks and insurers to suspend dividends during the crisis and reconsider paying bonuses, but so far there has been no formal guidance for asset managers.
“It’s important for all financial market participants to realise that difficult times are ahead and they need to look from that perspective when taking decisions either on remuneration or in terms of dividend policy,” Maijoor said.
Several EU states, including France, Italy, Spain and Austria, introduced bans on short-selling of shares, but so far Germany, along with Britain, which still operates under EU rules, have held back.
Said Maijoor, “At this stage, the view of the ESMA board is that there is no need for a European-wide ban, but it’s good to have that tool in the tool kit.”