Question

, the idea of the creation of a European Credit Rating Agent has been put forward by some European policy makers. Describe and discuss the potential positive and negative effects of this proposal.

Answer 1

The establishment of a European credit rating agency has its own pros and cons. The advantages includes:-

• Breaking up the monopoly of the three US based credit rating agency
• Bringing a fresh perspective in credit rating which reflects the European realities and thus free from existing biases.
• European governments and businesses could use the credit rating agencies opinion to negotiate a better deal for themselves as now they are completely dependent on the three US agencies
• The European credit rating agency might prove to be better and more independent appraiser of products and could remove some of the ills of the US based agencies which failed to predict the financial crisis and there were reports of conflict of interests.

The disadvantages are:-

• Establishment of a separate credit rating agency requires upfront investment
• The credibility of the ratings would take some time to mature and till that time the market will remain influenced by the US based agencies
• There are no safeguards that the new agency would be able to function in a more credible and independent way
• The financial markets and global economy could be confused by the potentially divergent viewpoints of the US based agencies and the European agency