Draghi: Rely less on ratings agencies
FRANKFURT, Germany—European Central Bank head Mario Draghi says it's time for investors and regulators to rely less on ratings agencies.
Draghi, speaking as the chair of the European Systemic Risk Board, told a committee of the European Parliament in Strasbourg that "one needs to ask how important are these ratings for the marketplace, for the regulators and for investors."
Draghi noted that downgrades had largely been anticipated by markets. Standard & Poor's downgraded nine eurozone governments on Friday, but markets remained calm on Monday. French President Nicolas Sarkozy, whose country was downgraded to AA plus from AAA, said the downgrade "changes nothing."
The ratings move nonetheless served as another sign that the eurozone faces an extended struggle to cut deficits and find the economic growth needed to overcome its debt problems. Among the consequences could be higher borrowing costs for governments, adding pressure to their finances, as well as for the eurozone bailout fund, which was also downgraded Monday.
Draghi said he couldn't comment on particular ratings, but added that "as regulators we should learn to do without ratings." Or people could use ratings as just one piece of information "rather than spend too much time on what they say or do."
Although he was speaking as risk board chair, Draghi added that the ECB was an example of an institution that did not give excessive attention to rating agencies.
As stability board head, he gave parliament members a sobering assessment of the state of Europe's financial system, which is under severe pressure from fears governments may not be able to sustain large levels of debt. That puts pressure on banks that hold government bonds, whose prices fall because of fears of default.
"We are in a very grave state of affairs and we must not shy away from this fact," Draghi said. He said the European Central Bank had helped avoid a worsening of the crisis by handing out euro489 billion ($624.5 billion) in crisis loans to 523 banks.
He said that avoided "a major credit crunch" stemming from a funding emergency at banks with some euro200 billion in their own bonds maturing in the first quarter of this year.
Still, he conceded that the interbank lending market in which banks usually raise money to operate "is basically nonfunctioning."
That has left some banks dependent on ECB credit to keep operating.