November 29, 2011

Moody’s Threatens Ratings Cuts for European Banks

Removal of government support may trigger new lows

The banks of 15 countries in Europe have been put on notice by Moody’s: their subordinated debt ratings may be cut by the agency because there is the possibility that government support for that debt will not be forthcoming.

Bloomberg reported Tuesday that the ratings agency said all subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support have been placed on review for downgrade. Subordinated debt may be reduced by two levels, the agency said in a statement, while the rest may be cut a single level.

Austria, France, Italy and Spain are the countries where lenders have the most ratings on review, according to Moody’s, which also said that the whole region is under threat because of “rapid escalation” of the sovereign debt crisis. The agency said, “Systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody’s ratings.”

Among the banks to be placed under review are BNP Paribas and Société Générale of France; UniCredit of Italy; Spain’s Banco Santander; Zurich-based Credit Suisse and UBS.

In its statement, Moody’s said, “Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders.” It also said that in some cases, countries have “faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets.”

While the euro did not react much to the news, the Bloomberg Europe Banks and Financial Services Index lost 1.7% in midmorning European trading. Chief losers in the morning drop were Dexia, KBC Groep and Raiffeisen Bank International.

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