Claire Jones Trichet on the rating agencies’ oligopoly

ECB president Jean-Claude Trichet may be unwilling to cede to Angela Merkel’s calls to overrule ratings’ agencies judgement on a Greek default – selective or otherwise. However, Mr Trichet’s position on the big three’s dominance of the industry is in line with that of the eurozone’s political masters.

At both this month’s press conference and in an interview published Tuesday, Mr Trichet made it clear he agreed with German finance minister Wolfgang Schäuble’s point that the oligopolistic structure of the industry was far from ideal.

When asked whether he would favour the creation of a European rating agency – something which Ms Merkel has backed since before Lehman Brothers’ collapse – Mr Trichet was more oblique.

Trichet: The present framework of a very small number of global rating agencies is pro-cyclical, amplifying the booms and busts. This oligopolistic structure is not optimal. In any case, we encourage all initiatives that go in the direction of eliminating conflicts of interests (where they exist), improving surveillance and oversight and permitting more competition in this industry. Everything that goes in this direction is correct.

Given that the ECB is the monopoly issuer of euro banknotes and coins, one wonders whether it is wise for Mr Trichet to take such a line of argument. And calls for a European rating agency are slightly ridiculous given that Fitch is majority owned by a French company and dual headquartered in London and New York.

But leaving both points to one side, Mr Trichet’s comments on conflict of interest are important. An obvious conflict of interest exists in credit rating agencies’ business models because they are reliant on issuers, not investors, for funding. Rating agencies’ role in the mispricing of mortgage-backed securities highlighted the dangers of this. It is unclear, though, how creating a European rating agency would solve the problem. The creation of a state-sponsored agency would merely replace one conflict of interest with another. So either the new agency adopts the same business model as Fitch, Standard & Poor’s, and Moody’s, or it is funded by investors, not issuers.

But even if they manage to adopt such a model, this is far from perfect. Conflicts of interest would remain. Why? Because credit ratings are ingrained in the collateral frameworks and regulatory rulebooks of central bankers and supervisors, which would make the state among the biggest customers.