Archive for July 2011
Subversive Thoughts (3) – Regulating Rating Agencies with the Competition Rules
The rating agencies “oligopoly” has been trashed by virtually all EU policy makers in the past days.
The big question on the policy agenda is now: how to regulate them?
Here’s a first taste of my answer, which I will further articulate in a forthcoming paper with my assistant N. Neyrinck. This paper will make extensive use of my prior research on oligopolistic dominance.
Let’s start with two propositions.
Proposition 1: The market for rating services exhibits a bunch of features which makes them prone to antitrust scrutiny. Market structure is oligopolistic, with essentially three big players (Moody’s, S&P and Fitch). Conduct is close to coordination (tacit or explicit), with quasi simultaneous and identical downgrading cycles. Performance is welfare decreasing, with borrowers paying a steep price in terms of interest rates (not to talk of the price to pay for taxpayers, called to rescue downgraded countries)
Proposition 2: The toolbox of antitrust agencies comprises a variety of flexible remedies which could be instrumental to regulate the rating agencies oligopoly (e.g., structural and behavioral remedies). Moreover, competition policy is an exclusive EU competence. Hence, those Member States that are reluctant to regulate the rating agencies cannot undermine Commission action under the competition rules. Finally, the EU competition rules can be enforced in a timely fashion (think of Article 9 proceedings) and also apply to non-EU firms.
Obviously, the main outstanding issue is to build a case around those two basic propositions. This implies devising a credible theory of harm, in other words a scenario of anticompetitive conduct that would allegedly explain the rating agencies’ behavior.
On this, and out of pure speculation, an hypothesis with both a collusion and a foreclosure component can be floated. Together with a number of banks, the rating agencies may be trying to harm other rival banks that have purchased Greek and Portuguese paper. Of course, the main problem here would be to (i) explain why rating agencies have an interest in siding with certain banks and not others; (ii) establish a link, convergence of interests, concertation between the rating agencies and those banks.
But even in the absence of a strategic link with banks, one may still consider that the rating agencies conduct is amenable to antitrust scrutiny. After all, with their self-fulfilling prophecies, the rating agencies risk injuring the structure of banking markets by pushing certain players to bankruptcy. In turn, this will increase market concentration, weaken competition and harm consumer welfare. Note that scenarios of this kind are often found in secondary line injury price discrimination cases (where the seller places some third parties at a “competitive disadvantage” (a sort of negative externality?) in a related market). Hence, it would not be crazy for antitrust regulators to run a theory of this kind. Moreover, the explanation for the rating agencies’ conduct can perfectly be framed in the words used by (i) behavioral economists to describe irrational conduct – why hammer Greece and Portugal, and meanwhile maintain the US’ AAA?- in markets where players are excessively risk averse; or (ii) conventional economists to describe information imperfections and reputation dynamics (to stay credible, agencies need to be tough on rating).
Happy to have your comments on this.
PS: I had initially decided to use a picture of Cassandra to illustrate this post. I changed my mind given (i) the fact that Cassandra was often right, but never believed; and (ii) my musical tastes.
Old Wine, New Bottles
In their 2010 Horizontal Merger Guidelines, the US agencies have poured old wine in new bottles.
The section on coordinated effects adds a theory of harm to standard tacit collusion analysis. It is entitled “parallel accomodating conduct“, and consists in:
“situations in which each rival’s response to competitive moves made by others is individually rational, and not motivated by retaliation or deterrence nor intended to sustain an agreed-upon market outcome, but nevertheless emboldens price increases and weakens competitive incentives to reduce prices or offer customers better terms. Coordinated interaction includes conduct not otherwise condemned by the antitrust laws” (see p.24).
My reaction: this looks familiar, and similar, to unilateral effects scenarios arising in oligopolies as a result of product/location differenciation or in cases of price leadership.
But aren’t those theories of harm already caught under merger control rules?
Moreover, shouldn’t unilateral and coordinated effects scenarios be mutually exclusive on a given relevant market? This also seems to be the view of DG COMP’s former chief economist.
The alternative explanation: an attempt of the US agencies to discretely relax the heavy evidentiary constraints required for a finding of coordinated effects?
PS: it is now summer time in Europe. Our friends keep harassing us with end afternoon drinks proposals at Brussels’ terrasses. For social reasons, Alfonso and I have thus decided to limit our posting pace to three stories a week in July. BTW, I heard through the grapevine that the Hogan Lovells party was huge (in very many respects…).
We want you!
Chillin’Competition currently has between 2,500 and 3,000 weekly readers.
However, “only” 100 of you are subscribed to the blog, and “only”142 of you have joined our LinkedIn group.
It is really useful for us to have some info on who the readers of the blog are, since it enables us to better target our posts. Subscriptors are immediately notified of new posts and their identity (or rather their email address) is only known by us. The LinkedIn group gives us the same info and also enables you to know who other readers are (in fact, the group is so far fulfilling its mission since it has proved useful in fostering some interaction amonsgt you).
So, a message to those who have not yet subscribed/joined the group: We want you!
Death in Venice: The end of a Commission’s locus standi theory in State aid cases?
[Note by Alfonso: Once again, it´s a pleasure to have our friend, State aid expert, and colleague of mine Napoleón Ruiz (don´t be fooled by the picture, he´s real) informing us of what´s new in the world of State aids. We leave you with him].
Thanks again to Nico and Alfonso for inviting me to write a post on State aid matters. My previous post was devoted to explaining how “vaporous” some of the legal concepts which make up the notion of State aid are.
As a sequel of my previous post, I would like to briefly refer to another interesting battlefield within the State aid area: the locus standi of the beneficiaries of aid schemes ( think, for instance, of tax measures) to challenge negative decisions of the Commission. In contrast with antitrust practice where undertakings are always the addressees of the Commission’s decisions, in State aid cases the addressees of Commission decisions are –in theory- exclusively member States.
State aid cases brought before the European Courts by recipients of the aids usually begin with ferocious debates with the Commission on whether the appellants fulfill, or not, the famous Plaumann test. Needless to say, the Commission is not precisely enthusiastic when it comes to accepting undertakings appealing its Decisions; that is true to such an extent that one could attribute it the nickname of “Dr. No” (which is the answer one –almost- always gets when asking whether an aid beneficiary is individually concerned by a negative decision). The Commission’s argument in this regard is simple and sharp: in order for an undertaking to be individually concerned, it needs to prove that it has actually benefited from the aid, and that can only be demonstrated when the applicant has been addressed a recovery order from the Member State before lodging the appeal (and that does not happen so often). Otherwise, that undertaking must refer to the national judge and pray request: (i) that the Court declares itself competent to rule the case and (ii) that it raises a preliminary reference of validity of the Commission´s decision (which does not happen frequently either ).
Frankly, one does not need to be a constitutional law expert to find this argument at odds with the most basic conception of the right to access to justice under article 6 of the ECHR.
That was indeed the state of play in State aid cases until just a couple of weeks ago, when the ECJ issued an important ruling which has gone relatively unnoticed. I am referring to the so-called Hotel Cipriani (a very recommendable place to stay in Venice if one can afford it…) case (C-71/09 P). In that case, the ECJ upheld the GC’s ruling, dismissing the Commission’ pleas on admissibility and clarifying the boundaries of the Plaumann test in such cases. In particular, the Court states in paragraphs 55-57 of the Judgment that:
“The Court must dismiss at the outset the argument that the recovery obligation imposed by the contested decision did not sufficiently identify the applicants at the time that that decision was adopted. (…)
As the Advocate General has pointed out (…), the order for recovery already concerns all the beneficiaries of the system in question individually in that they are exposed, as from the time of the adoption of the contested decision, to the risk that the advantages which they have received will be recovered, and thus find their legal position affected. Those beneficiaries thus form part of a restricted circle (…), without it being necessary to examine additional conditions, concerning situations in which the Commission’s decision is not accompanied by a recovery order. Moreover, the eventuality that, subsequently, the advantages declared illegal may not be recovered from their beneficiaries does not exclude the latter from being regarded as individually concerned.
The Court must also dismiss the Commission’s argument that recognition of the admissibility of actions against a decision of the latter ordering the recovery of State aid had the ‘paradoxical and perverse’ effect of requiring the beneficiaries of the State aid to challenge that decision immediately, before even knowing whether it would lead to a recovery order concerning them. (…)”
It seems to me that the wording of the Judgment leaves little room for interpretation: the Court finds that the order for recovery imposed by the Decision is, by itself, sufficient to individually concern a beneficiary without any further requirements (i.e. individual order of recovery addressed to the beneficiary by the Member State). Thus, the ECJ definitely quashes the Commission’ position regarding the locus standi of beneficiaries and, in my view closes the debate.
In conclusion, although I would not insinuate that the Commission was as “fond” of the argument as was the character of Dr. Von Aschenbach of young Tadzio in Thomas Mann’ tale (masterly brought to the screen by Luchino Visconti), it is however true that this Judgment strikes a serious blow to the procedural strategy of the Commission, which from now onwards will have to focus much more on substance and less on admissibility.
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