S&P’s French Flub Fuels Backlash Against Ratings Agencies

Standard & Poor’s accidentally sent out an e-mail message to clients saying that it was downgrading France’s prized “AAA” credit rating, a mistake that had both Germany and the European Union issuing their own warnings today underscoring concern over how much power ratings agencies have come to wield over governments.

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The error went uncorrected for an hour and a half on Thursday, spooking investors who had been focused on Italy and Greece, not suspecting the crisis had yet spread to the euro zone’s second-largest economy. Most European markets were still open at the time of the false announcement, and U.S. financial markets were just beginning the day.

Standard & Poor’s ultimately issued a statement saying the original message had gone out to some subscribers because of a technical error, reaffirming that France’s credit rating remained “AAA” — the agency’s highest level — and had a “stable” outlook. However, the incident reminded investors of France’s financial ties to the the troubled sovereigns, and foreshadowed what could come if Italy is unable to stem the spread of the contagion.

French Finance Minister Francois Baroin called the error a “rather shocking rumor of information that has no foundation,” and immediately called for an investigation into how the mistake was made, a call immediately taken up by French regulator AMF, which has already launched its own investigation and has contacted the European Securities and Markets Authority.

The event is likely to increase already palpable European hostility toward the big three ratings agencies, all of which have roots in the U.S., though Fitch is partially owned by a French company.

European internal markets commissioner Michel Bernier has been working on new regulations for the agencies, and said Europe should reduce its reliance on the agencies and increase competition, possibly by creating a new European agency. Yesterday’s incident will likely only fuel his efforts.

“This incident is serious and it shows that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility,” Barnier said.

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German Chancellor Angela Merkel’s spokesman issued a similar warning today in Berlin. “We say only this, and we have said it repeatedly in the past: All financial market actors, and that includes rating agencies, must be aware of their responsibility to society,” Steffen Seibert said.