Shaking the habit of ratings – or debt?

When addicts try to come off drugs, they often suffer symptoms of the withdrawal. They sweat more profusely and more easily. They grow paranoid, thinking everyone is out to get them. They get angry and lash out, sometimes inappropriately. The crisis in European sovereign debt feels a little like that sometimes. Now we read these words:
Ratings currently have a quasi-institutional role. We need to reduce our reliance on them.

They come from the European Commission's news release concerning plans for what the European Union calls a directive and a regulation on credit ratings. While the commission backed off its threat to demand that rating agencies withhold comments on sovereign borrowers that undertake financial restructuring, its plans are still at best something to address the symptoms without addressing the cause. Cold turkey it isn't.

Ratings do have a "quasi-institutional role", but that's because they are designed to give confidence in and achieve legitimacy for the borrowers and their ability to pay back their loans. Suspending credit ratings in a time of distress would make little sense as the suspension would be just a downgrade in disguise. One way or the other, credit ratings would still be a part of the institutional framework in which public borrowers operate. Reducing reliance on them could mean things like ensuring that legislation and regulation avoids measures that embed credit ratings in their fabric. But it's not really the borrower or the legislation that "relies" on ratings. The investors rely on them as a check on the system, as a mechanism to ensure the borrowers don't lie. Borrowers "rely" on credit ratings the way a drug addict "relies" on needles. Borrowers "need" money the way a drug addict "needs" a fix.

The solution to the sovereign debt issue in Europe is likely to involve a slow and painful adjustment to the withdrawal of money. Only when that happens will the reliance of credit ratings disappear. If the credit ratings themselves disappeared while the need was still present, borrowers would still be in a fix.

Source document: The news release outlines the commission's planned move.