Moody’s gives away EU market share for free

The decision by Moody’s to cease endorsing ratings of US municipal bonds for use in the European Union (EU) has led to significant implications for the market shares of credit rating agencies (CRAs). This move resulted in the removal of approximately 290,000 sovereign ratings from the ESMA RADAR database, thereby causing a notable reduction in the total number of outstanding ratings in early 2024. The rationale behind this decision was that US municipal bonds are predominantly invested in by US residents, rendering their ratings less relevant for the EU market. Consequently, the exclusion of these ratings led to a realignment in the overall distribution of market shares among CRAs, influencing their competitive positioning in the industry.

The decision by Moody’s to stop endorsing US municipal bond ratings for use in the EU did not significantly impact Moody’s stock price in the short term. While this move led to a notable reduction in the number of sovereign ratings in the ESMA database, the market reaction remained muted. Moody’s stock did not show any decline, with only minor fluctuations observed, likely due to the market’s focus on broader economic conditions, such as interest rates and the US debt outlook​. Moody’s stock experienced a significant rise of around 40% over the past year. This increase suggests that the decision to de-endorse US municipal bond ratings for the EU market did not negatively affect investor sentiment regarding Moody’s overall business performance. The stock’s growth likely reflects broader factors, such as strong earnings, market dynamics, and the agency’s continued dominance in the solicited ratings market, rather than the specific impact of the municipal bond rating decision.

Overall, the recent developments around Moody’s decision and the resulting changes in market shares of CRAs suggest a dynamic and evolving credit rating industry. While the decline in the big three’s share of outstanding ratings presents opportunities for smaller players, their entrenched position in the solicited ratings market highlights the challenges of altering the competitive landscape. The interplay between these trends will likely shape the future of credit ratings, influencing both market participants and regulatory frameworks in the EU and beyond.