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.”