The shockwaves sent out by Greece’s continued economic woes have prompted calls to establish a European credit rating agency. The move is being presented as a way to inject some competition into the ratings agency market which is currently dominated by US firms such as Standard & Poor’s who recently downgraded Greek government bonds to ‘junk’ status.

However, the language being used by EU leaders such as Angela Merkel seems to suggest that there is more than just a desire for increased competition at play. Indeed, Michel Barnier, the European Commissioner charged with internal market regulation, told the parliament that the power wielded by the big credit rating agencies is “quite considerable not only for companies, but also for states”. The Commission and EU leaders were angered by the downgrading of Greek bonds and it would appear that an EU credit rating agency would be aimed at protecting EU member states from the world market.

The European Central Bank’s decision to accept Greek ‘junk’ bonds as collateral for loans to Greek banks is yet another sign that a European ratings agency might be used to present overly optimistic ratings in order to prevent member states falling into the ‘vicious circle’ that rating downgrades can cause. Portugal, Italy and Spain have also suffered downgrades in recent days. The desire to protect the EU from the extremes of the world market however, could have a significant effect on future stability. There have already been charges from inside and outside the EU that the current Greek bailout will simply compound Greece’s debt problem as it is essentially geared to allow the country to take on more debt.

It remains to be seen how a European ratings agency would be seen by investors, it is likely that it would not be held in the same regard as other more established and, most importantly, independent agencies such as the ‘big three’ in the US. However, if it were an agency primarily concerned with sovereign debt, it might not need market approval as it’s main purpose would presumably be to put a pretty face on the debt crises faced by member states in order to make EU bailouts more palatable in the future. Some might say the move is an attempt to put lipstick on PIIGS.