See no evil, hear no evil, and, if you are a ratings agency, speak no evil

You don’t have to look too far to find nutty policy proposals.

One of my favorites is  Herman Cain’s suggestion that Congressional bills be limited to no more than three pages.

Another, reported in recent days by both the Financial Times (which claims to have seen an actual draft) and the Wall Street Journal, is the European Union’s suggestion that regulators would be given powers to suspend credit ratings of countries undergoing bail-outs.

According to the FT, the proposal would give the European Securities and Markets Authority (ESMA) the right to: “suspend ratings of countries in bail-out programmes so that adverse ratings are not issued at “inappropriate moments”.”

I would love to be able to ask a Finance Minister when he or she thinks an appropriate moment would be to downgrade his or her country’s credit rating.

According to the FT, the draft continues: “In order to prevent that credit rating agencies issue sovereign ratings which do not accurately reflect the situation of the country concerned and would cause negative spillover effects to other countries, Esma should be granted the power to temporarily restrict the issuance of credit ratings in exceptional, precicely defined situations.”

Actually, I think the objective is to prevent the ratings agencies from issuing sovereign ratings that accurately reflect the situation in the country.

The Journal correctly points out two flaws with the proposed policy: (1) ratings agencies seldom lead the markets (recall that S&P downgraded the US when it was hours away from a default); (2) investors will just use other metrics, such as bond yields and spreads.

Of course, the EU might want to think about banning newspapers or web sites that publish such subversive data….

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