German ratings firm Scope seeks ECB recognition

August 24, 2016 7:59 AM EDT

European Union (EU) flags fly in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 3, 2015. REUTERS/Ralph Orlowski/File Photo


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By Marc Jones

LONDON (Reuters) - German rating firm Scope says it is in talks to become one of the European Central Bank's recognised sovereign credit agencies, though tough requirements mean the process could take at least three years.

Scope would become the first agency based in continental Europe to rate assets included in the ECB's purchase programme, and its acceptance might offer an extra lifeline to some euro zone governments currently struggling to maintain their debt at investment grade.

Scope's chief executive Torsten Hinrichs told Reuters that joining Standard and Poor's, Moody's, Fitch and DBRS as agencies in carrying the ECB stamp of approval was key to its ambitions.

"We are in regular discussions with the ECB, and since we are investing strategically and with a long-term horizon we are confident that we will fulfill their eligibility criteria in due time," Hinrichs said.

Berlin-based Scope, which became an EU-approved agency in 2011, has just acquired German rival Feri EuroRating to give it a sovereign ratings arm.

That acquisition had brought ECB approval a "step closer" Hinrichs said, but acknowledged this was still some way off.

"We are still several years from meeting all the stringent criteria," he said citing particularly the ECB's requirement to have a three-year track record on key ratings.

The wait will make attracting new business from the companies and governments that are its main customers that much harder, and will also be a potential frustration for some euro zone governments, for example in Lisbon.

Feri, which will be folded into Scope, rates Portugal at BBB. That is a notch higher than DBRS whose BBB (low) grade is the only rating keeping the country's bonds within the ECB's 1.5 trillion euro purchase programme.

The ECB only buys a government's debt if it has at least one investment grade rating or is in a formal bailout programme. So if Feri was already recognized by the central bank, Lisbon would have a bit more breathing space.

Italy is also beholden to Toronto-based DBRS. It put Rome's A (low) rating under review last month and if it downgrades, that will pile additional pressure on the country's struggling banks.

In that event, the ECB would trim as much as 8.5 percent of the value of Italian bonds that many of the country's banks swap for zero-interest ECB loans. The lenders would then face a scramble to fill the gap with other suitable assets.

Feri's rating for Italy is on a par with DBRS at A-, which again would have provided an additional buffer.

CHICKEN AND EGG

An ECB spokeswoman declined to comment on the status of discussions with Scope but said the central bank "accepts all rating agencies that are appropriate for the specific purpose of monetary policy operations."

A crucial prerequisite was "well-established and diversified credit risk expertise across asset classes and euro area countries."

The ECB laid out fuller details last year, stating any new agency must rate at least three out of four of covered bonds, uncovered bonds, corporate bonds and asset-backed securities, and two-thirds of the euro zone's 19 countries. (click https://www.ecb.europa.eu/pub/pdf/other/eb201601_focus03.en.pdf)

Hinrichs said the demand for a three-year rating track record was the biggest hurdle.

"ECB eligibility requirements create a 'chicken and egg' problem for any European credit rating agency which wants to challenge the oligopoly of the big three (S&P, Moody's, Fitch)."

"Lack of ECB recognition makes it harder to win new clients. At the same time, comprehensive coverage of European credit assets is a key ECB requirement."

(Additional reporting by John Geddie; editing by John Stonestreet)



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