Moody’s Threatens Credit Downgrades for Belgium, U.S.

Spain outlook remains at negative for ‘severely tested’ profitability

Ratings agencies piled on the gloom early in the week as Moody’s (MCO:US) maintained its negative outlook on Spain’s banking system and warned on Monday that the U.S. might be in for a downgrade in its credit rating if the tax deal reached by President Obama and Republicans becomes law.

To add to the worries, Standard & Poor’s (MHP:US) said on Tuesday that Belgium’s sovereign debt could be downgraded within six months, contingent on its ability to form a new government and its debt trajectory.

According to a Bloomberg report, Moody’s Investors Service issued a report that said Spain’s banks will be “severely tested” for profitability as funding expenses rise and the call for loans drops. A calculation based on the assumption that the banking industry’s Tier 1 capital ratio, an important indicator of financial strength, is at a minimum 8% indicates that banks face a net capital shortfall of $22.5 billion, or 17 billion euros. Moody’s sees a base-case scenario of 176 billion euros in losses across the life of banks’ loans, it says, while the banks themselves have only written down or used reserves to make up for 88 billion euros in losses.

The authors of the report, Alberto Postigo and AA+/A-1+ was, said in a statement, “We expect profitability to be seriously tested going forward, as demand for loans will likely fall and funding costs increase at a time when provisioning requirements remain high.”

Moody’s also didn’t think much of the Obama-Republican tax package, saying in a Reuters report that it could push up debt levels and leave the U.S. in for a ratings cut from its present Aaa level. Moody’s said that if the bill became law, it will “adversely affect the federal government budget deficit and debt level.” In a late Sunday report, Steven Hess, a Moody’s analyst, said, “From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth.”

As Moody’s worried last week over the effects of the tax cuts becoming permanent, Fitch Ratings also expressed concern about the long-term viability of the U.S.’s credit rating.

Regarding Belgium, Standard & Poor’s released a statement that said in part, “We could lower the sovereign rating on Belgium one notch if we conclude that the lack of consensus will result in the government not being able to stabilize its debt trajectory to move towards reforms.” The company went on to say that if Belgium failed to form a government soon, “a downgrade could occur, potentially within six months.” The statement followed a downgrade of Belgium’s outlook to negative; however, its rating of AA+/A-1+ was unchanged.

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