If EU Bans Ratings Agencies From Evaluating Bailout Countries, Who Will Investors Turn To For Terrible Advice?

The Wall Street Journal reports today that the EU is "leaning toward proposing a ban on the issuing of sovereign credit ratings for countries in bailout talks." The EU's internal market commissioner, Michel Barnier, says that he thinks "it's legitimate to have a special treatment when a country is in negotiation or is covered by an international solidarity program with the IMF," and, indeed, new IMF chief Christine Lagarde has signaled that she believes it's appropriate for the EU to "prevent ratings for bailout countries."

As the EU has been "tightening rules on rating agencies progressively since the financial crisis," according to the Journal, with a new set of proposals on the matter scheduled to be made in early November, odds are decent that this will emerge as the consensus view. However, there are dissenting opinions, and, as Reuters' Ryan McCarthy points out, they are "hilarious":

"If ratings are banned, it will make it difficult for investors to assess the risk when a country returns to the bond market."

That's from economist Marchel Alexandrovich, and if you want to know why he should consider taking that act on the road, let's flash back to this piece from Shahien Nasiripour from September of 2009 -- one year after the global financial crisis:

Analysts at the three biggest credit rating agencies who gave positive, investment-grade ratings to AIG and Lehman Brothers up until their collapse have not been fired or disciplined, the heads of the agencies admitted at a Congressional hearing today.

Moody's, Standard & Poor's, and Fitch Ratings all maintained at least A ratings on AIG and Lehman Brothers up until mid-September of last year. Lehman Brothers declared bankruptcy Sept. 15; the federal government provided AIG with its first of four multibillion-dollar bailouts the next day.

[...]

At the hearing today, the exchange between [Representative Jackie] Speier and the agency chiefs was particularly contentious.

"You had rated AIG and Lehman Brothers as AAA, AA minutes before they were collapsing. After they did fail, did you take any action against those analysts who had rated them?" Speier asked. "Did you fire them? Did you suspend them? Did you take any actions against those who had put that kind of a remarkable grade on products that were junk?"

McDaniel answered first. "No, we did not fire any of the analysts involved in either AIG or Lehman," he replied.

"LOL," is what I believe the Internet would tend to say to all of this.

The Wall Street Journal reports, "There was no immediate comment from Fitch, S&P or Moody's."

Yeah, I wouldn't think so!

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