Banker-Founded Moody’s Downgrades 12 British Banks

AFP
October 7, 2011

Moody’s on Friday downgraded its credit ratings for a dozen British lenders, including state-rescued Royal Bank of Scotland and Lloyds TSB, due to the removal and curtailment of government financial support.

Moody’s said it chose to downgrade five large banks and seven small ones as government action had “significantly reduced the predictability of support over the medium to long-term.”

The downgrades did not concern major lenders HSBC, Barclays or Standard Chartered, the agency said in a statement. But it added that it believed Britain’s government was now more likely to allow small lenders to fail if necessary.

The announcement comes as the European Union seeks swift recapitalisation of the region’s banks to avert the eurozone debt crisis spreading across borders.

Moody’s had warned in May that it could downgrade British banks.

Its decision to follow up that warning could now result in banks facing higher rates of interest when looking to borrow money on markets, further hindering their attempts to return to better health.

Affected lenders’ share prices slumped in London trade after the downgrades, with Royal Bank of Scotland (RBS) down 3.53 percent at 23.5 pence and Lloyds Banking Group, the parent of Lloyds TSB, losing 3.64 percent to 34.56 pence.

At the same time, in midday trade, London’s benchmark FTSE 100 index was down 0.41 percent at 5,269.74 points.

RBS said it was “disappointed” that Moody’s had “not acknowledged the (bank’s) progress… in strengthening” its credit profile.

“We do, however, see the removal of implicit government support for the UK banking sector as being a necessary and important step forward as the sector returns to standalone strength,” it added in a statement.

The Financial Times newspaper meanwhile reported on Friday that the British government feared the prospect of injecting RBS with fresh capital under Europe-wide recapitalisation plans.

RBS received billions of pounds of taxpayers money under one of the world’s biggest-ever bank bailouts in the wake of the 2008 financial crisis, leaving it currently 83-percent owned by the British government.

Moody’s stressed on Friday that its financial sector downgrades did “not reflect a deterioration in the financial strength of the banking system or that of the government.”

Britain’s finance minister George Osborne said that despite the downgrades, he was confident that British banks were not facing the same problems as their eurozone peers.

“I am confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment,” he told BBC radio.

Chancellor of the Exchequer Osborne said the downgrades were in fact evidence that Britain’s coalition government was taking the correct action in removing support from the banks.

“As I understand it, one of the reasons they (Moody’s) are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain,” he added.

Moody’s said it had downgraded RBS and Nationwide Building Society each by two notches to A2 from Aa3; Lloyds TSB Bank and Santander UK were cut by one grade to A1 from Aa3; the Co-Operative Bank was downgraded one level to A3 from A2.

“Moody’s Investors Service has today downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution,” the agency said in a statement.

“The downgrades have been caused by Moody’s reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support… for five larger, more systemically important financial institutions.”

Moody’s said it “believes that the government is likely to continue to provide some level of support to systemically important financial institutions… However, it is more likely now to allow smaller institutions to fail if they become financially troubled.”

The agency added that it had downgraded seven smaller lenders by between one and five notches.

Washington Wakes To The Downgrade — And Does Nothing

Business Insider
August 8, 2011

Tens of thousands of congressional staffers, government employees and K-street lobbyists begin their first work-day after Standard and Poor’s downgraded the United States Friday, but elected officials — including the one occupying the White House— are nowhere to be found.

Politicians of both parties are escaping the DC heat and humidity for the month-long August recess, while President Barack Obama is scaling back his public event schedule as his campaign continues fundraising activities.

The S&P action has done little to change the political reality in the near term — that Congress is taking a vacation while leaving half-a-dozen jobs bills and the federal budget incomplete. And for the next month, there will be no response from Washington other than the blame game.

Neither party is quite sure how the public is reacting to news of the downgrade, with Republicans criticizing Democrats, and Democrats criticizing S&P.

For Obama the downgrade is a massive liability, as he is the most visible member of a government now deemed to be at some risk of not meeting its obligations. Republicans are on the hook for their opposition to tax reforms, cited by S&P as a key factor in the decision to strip the U.S. of its ‘AAA’ rating.

Looking ahead, the downgrade puts new pressures on the “Super Committee,” created less than a week ago to cut $1.5 trillion from the deficit, to exceed its goal by as much as $2 trillion to meet the S&P’s target.

Hopes for the bipartisan group dimmed last week, as Republicans and Democrats waged a public battle over the need for revenue-raising reforms and whether to include entitlement spending as part of the discussions.

S&P said it doubts that a serious attempt at either will succeed. Ratings officials even threatened a second downgrade if the committee failed to meet its statutory requirements, despite the triggered cuts that would take effect.

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European Central Bank acts to prop up debt of Italy, Spain

By Anthony Faiola
Washington Post
August 8, 2011

LONDON—Moving to stem panic of an escalating debt crisis in Europe, the European Central Bank on Sunday signaled it would intervene in bond markets to prop up hard-hit Italy and Spain, as world leaders scrambled to calm investors before the opening of financial markets Monday.

The reluctant decision by the ECB underscored the gravity of a crisis that some fear could lead to a messy breakup of the euro zone if not quickly contained, and which has gathered fresh urgency following the downgrading of U.S. debt by Standard & Poors.

Worried investors have been dumping Italian and Spanish bonds, driving their borrowing costs to record levels in recent days and sparking fears the world’s 7th and 12th largest economies could be engulfed by the same kind of crisis that forced far smaller Greece, Ireland and Portugal to request emergency bailouts. By intervening in bond markets, however, the bank could at least temporarily take some of the pressure off both nations by buying debt that private investors now see as too risky.

The ECB, as is customary, did not explicitly say it would buy Italian and Spanish bonds. But it strongly suggested in a statement that it would do so, with its move amounting to an admission that the bank’s tepid dabbling in bond markets last week did not go nearly far enough in calming investors. The bank’s governing council agreed after an 11th-hour emergency teleconference on Italy and Spain to take more drastic steps “to ensure [bond] price stability in the euro area.”

The move came as European leaders Sunday were scrambling to calm investors jittery over the crushing debt of wealthy nations. Without further steps from governments and central bankers, analysts fear more drops in global stock markets – with bourses in the Middle East, open on Sunday, tumbling ahead of the opening of key Asian trading.

A European official who declined to be named given the sensitivity of the issue said “a range of international discussions” was coming together Sunday. Those talks were set to include conference calls between G7 financial chiefs.

German Chancellor Angela Merkel and French President Nicholas Sarkozy issued a joint statement backing moves by Rome and Madrid on Friday to speed up austerity measures and adopt reforms to improve stagnant growth.

Opposition in fiscally conservative Germany, by far the largest economy in the 17-nation euro zone, to intervention by the ECB was seen as one major factor holding the bank back. But the ECB, in the text of its statement Sunday, appeared to interpret Merkel’s joint statement with Sarkozy as a sign of grudging acceptance from Berlin that more must be done.

With concern increasingly centered on Italy, whose debt amounts to a whopping 119 percent of its national economy, Merkel and Sarkozy “especially” welcomed the announcement by Italian Prime Minister Silvio Berlusconi “to achieve a balanced budget a year earlier than previously envisaged.”

Raj Badiani, an economist with IHS Global Insight in London, called the ECB move “an attempt to provide a sharp jolt to the negative sentiment engulfing Spain and Italy.”

But he and others warned it may only be a short-term solution. The ECB cannot indefinitely intervene in European bond markets on such a grand scale. A program that goes on too long could trigger inflation and undermine the stability of the euro. Rather, the ECB may effectively be buying time for European leaders to do something they have thus far failed to do — take decisive action to end the crisis.

Analysts have been calling for European leaders to greatly expand a bailout fund to cover a worst-case scenario in Italy and Spain. But European leaders were doggedly sticking to a July 21 agreement that once again shored up Greece while also allowing rescue funds to be used to buy up the bonds of troubled nations in times of crisis, much like the ECB.

But the pool of cash available, about $616 billion, does not approach the level needed to aid Italy or Spain, and European leaders have showed no signs of agreement in raising that amount. In addition, all 17 nations in the euro zone still need to ratify that deal before it can go into effect.

Europe, led by Germany, has bailed out Greece, Ireland and Portugal. But German voters have had it with bailouts, and in a worst-case scenario Italy would need roughly $1.4 trillion — or more than double the size of the current European rescue fund.

Rather, Europeans leaders and the ECB seem to be banking on temporary intervention to give Italy and Spain time to make good on their pledges to restore market confidence through budget cuts and long-awaited economic reforms.

“I suspect it could help to stabilize Italian bond yields at current levels, and help to deflect some of the financial contagion hitting Italy,” Badiani said. “However, we will need to see much more detail about the scale of the proposals and the pace of implementation before there is any significant unwinding of the bond yield rises of the past month.”

If Italy or Spain fails to quell market panic, analysts say, Europeans might be forced to move toward the advent of a new euro-bond, putting the economic weight of Germany behind its profligate neighbors. But Germany and other northern European nations remain opposed to such a deal, as well as the more radical step of a more established fiscal union that would go further in turning a vast chunk of Europe into one giant economy.

As Predicted, Democrats Blame Tea Party for Downgrade

Meanwhile, Senator Lindsey Graham said something diametrically opposite that does reflect reality: “The tea party hasn’t destroyed Washington. Washington was destroyed before the tea party got here.”

by Ben Wolfgang
Washington Post
August 8, 2011

While continuing to cast doubt on the credibility of Standard & Poor’s, several Democrats on Sunday said there is an even greater culprit in the downgrade of the nation’s credit rating: the tea party.

“I believe this is, without question, the tea party downgrade,” Sen. John F. Kerry, Massachusetts Democrat, said on NBC’s “Meet the Press” on Sunday, a day that also saw mounting anxieties in world markets over the downgrade among myriad other economic woes worldwide. Some of the world’s top financial ministers issued a joint statement Sunday night committing themselves to preserve the stability of financial markets and their economies.

David Axelrod, a former senior adviser to President Obama, used the exact same phrase in dubbing the credit rating drop the “tea party downgrade,” as Democrats tried to position themselves as reasonable, pragmatic leaders and conservative Republicans as irresponsible ideologues who caused the downgrade by refusing to accept any new taxes.

That’s exactly the kind of blame game that led Standard & Poor’s, one of three key credit-ratings agencies, to strip the U.S. federal government of its AAA status Friday night and reducing it to AA+ for the first time in the nation’s history.

“Congress and the administration are jointly responsible for the conduct of fiscal policy. So, this is not really about either political party,” David Beers, the head of S&P’s government debt-rating unit, said during an appearance on “Fox News Sunday.”

In justifying its actions, S&P cited the political gridlock that continues to paralyze Washington. Although Democrats and Republicans eventually came together last week and crafted a compromise bill to raise the nation’s debt ceiling, S&P decided it wasn’t enough to save the nation’s AAA status, a rating still held by France, Sweden and other countries, and businesses such as Coca-Cola Co. and Microsoft Corp.

“Even with the agreement of Congress and the administration this past week … the underlying debt burden of the U.S. government is rising and will continue to do so most likely over the next decade,” Mr. Beers said.

Sen. Lindsey Graham, South Carolina Republican, defended the tea party and said that without the movement, trillions of dollars in spending cuts wouldn’t be possible.

“Thank God they’re here,” he said on CBS’ “Face the Nation.”

“This is the first time we’ve ever raised the debt ceiling where we tried to actually reduce spending. That’s a good thing, but we’re woefully short,” he said. “The tea party hasn’t destroyed Washington. Washington was destroyed before the tea party got here. The hope is that the tea party and middle-of-the-road people can find common ground to turn this country around before we become Greece.”

Democrats, who also had harsh words for S&P, said there’s enough blame to go around.

Lawrence H. Summers, former director of Mr. Obama’s National Economic Council, on Sunday called the agency’s track record “terrible.” He referenced S&P’s highly positive ratings for mortgage-backed securities that tanked in 2008, which many blame for the ongoing economic crisis.

Treasury Secretary Timothy F. Geithner, in his first public comments on the credit downgrade, told CNBC that S&P had shown “terrible judgment.”

“They’ve handled themselves very poorly. And they’ve shown a stunning lack of knowledge about the basic U.S. fiscal budget math,” he said.

Democrats weren’t alone in their stinging critiques of S&P. Speaking on CNN’s “State of the Union,” Steve Forbes, former Republican presidential candidate and CEO of Forbes Inc., said the downgrade was “outrageous” and “a political move.”

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