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Moody’s downgrades ‘will have little effect on UK banks’

Rating agency downgrades 12 UK financial institutions but the risk lies in the rest of Europe, say analysts


Moody’s rating revision of 12 financial institutions will have little effect on the economy and banks in the UK, and are instead an attempt by the rating agency to regain credibility after the 2008 crisis, analysts claim.

Indeed, higher risk of bank failure lies in Europe, experts stress.

Moody’s downgrades hit some of the UK’s largest banks. Lloyds TSB was downgraded by one notch, from Aa3 to A1, and RBS by two notches, from Aa3 to A2. Barclays and HSBC’s ratings remained unchanged.

“The downgrade is nothing to get that concerned about,” says Joshua Raymond, chief market strategist at City Index. “It will affect banks to a certain extent, but is probably more connected to raising Moody’s credibility.

“After the crisis of 2008, rating agencies like Moody’s experienced a credibility crisis. Agencies had given top-notch ratings to toxic debt and this led, in part, to the crisis in 2008 by making investors somewhat blindsided.”

On Friday, Lloyds Banking Group shares fell 3.2% and RBS fell 3%. Barclays, one of the banks not affected by the downgrade, also fell by 2.9%.

“Indeed, by publishing these new ratings and being much more aggressive in revising ratings of other banks and institutions, Moody’s is trying to restore some of the credibility it lost in 2008,” says Raymond.

Other analysts argue that Moody’s reputation is irrelevant.

While some analysts say that Moody’s services are still credible when it comes to ratings, other experts claim that rating agencies are always playing catch up.

“Rating agencies are behind the curve,” says James Ferguson, head of strategy at Arbuthnot Securities. “They downgrade banks after the yield has already risen. In practice, ratings do not come first – they just tell us what the markets are doing after it has been done.”

Moody’s downgrades were disparaged by banks.

RBS was disappointed that Moody's had not acknowledged its progress in improving credit profile since 2008 and referred to itself as one of the strongest capitalized banks in Europe, while Lloyds alleged that Moody’s downgrade will have minimal impact on funding costs.

It is in Europe, rather than solely the UK, where banks are feeling the pressure, analysts say. The risk of bailing out banks in the UK is not as high as the risk faced in the rest of Europe.

“Pan-Europe, we will have to bail out some banks,” says Alex Potter, senior analyst at Berenberg Bank. “We can never say never [to bailing out UK banks again in the future], but the risk of this is lower than in the rest of Europe. This is because UK banks have lower PIIGS sovereign debt exposure than many in the rest of Europe.”

But the point is that the UK will have to work in union with the rest of Europe.

As Stefan Angele, head of investment management at Swiss & Global Asset Management, says: “Can a country afford not to react? Who really cares about long-term moral hazard problems if we might get into a situation where the banking system stares into abyss? Remember contagion after the Lehman collapse?”

Raymond adds: “Because banks are looking like they are being forced to take bigger haircuts on their holdings of Greek debt and the slowdown of interbank lending, this may warrant further support throughout Europe, not just in the UK. This is why Angela Merkel is trying to push through co-ordinated moves to recapitalize eurozone banks.”

On Wednesday, Merkel, the German chancellor, said Berlin would be prepared to recapitalize its banking sector and was willing to discuss a European Union-wide plan to address the health of the European banking system.

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