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14 May 2012

Moody’s Bank Downgrades Risk Choking European Recovery

Moody’s Investors Service will this month start cutting the credit ratings of more than 100 banks, a move that risks pushing up their funding costs and forcing them to curb lending in a threat to economic growth.

BNP Paribas SA (BNP), France’s biggest lender, Deutsche Bank AG, Germany’s largest, and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels by Moody’s, the ratings company said in February.

The cuts, which would follow downgrades by Standard & Poor’s and Fitch Ratings last year, could erode profits, trigger margin calls and leave some firms unable to borrow from money- market funds that have strict rules on who they can lend to. Without access to funding from private sources, banks have had to sell assets and reduce lending.

“I’d like to say the views of the rating agencies don’t matter anymore but, unfortunately, they do,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor. “This is a setback for the banks, particularly when you consider how much progress they have made in making themselves safer and more transparent.”

Even after the European Central Bank provided an unprecedented 1 trillion euros ($1.3 trillion) of three-year loans to bolster the region’s banks, loans to non-financial companies in the euro area fell 0.17 percent in April, according to ECB data. Europe’s economy probably slipped into recession in the first quarter as the debt crisis forced governments to step up spending cuts, according to 16 out of 19 economists surveyed by Bloomberg.

“The more the cost of wholesale funding goes up, the more likely it is that banks will want to retreat closer to a loan- to-deposit ratio of one,” said Huw van Steenis, a banking analyst at Morgan Stanley (MS) in London. “That adds to the intense pressure to deleverage, which will be a drag anchor on European economic recovery.”

Moody’s said in January it would overhaul how it rates European banks and firms with global securities operations to reflect the adverse effects of the sovereign-debt crisis, dwindling economic growth and the latest round of capital rules set by the Basel Committee on Banking Supervision.

The ratings company said in an April 13 note that it will start the downgrades in early May with a review of Italian lenders, before moving on to countries including Spain, Austria, Sweden, Norway, the U.K. and Germany. Global capital-markets firms, including the U.S. investment banks, are unlikely to have their ratings changed until June, according to analysts. 


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