Moody's is cutting its credit ratings on 28 Spanish banks, saying the weakening finances of Spain's government is making it more difficult for the country to support its lenders.
The agency also said the banks are vulnerable to losses from Spain's burst real estate bubble.
The
announcement came on the same day that Spain's government formally
asked for help from its European neighbours in cleaning up its stricken
banking sector. However the request left many questions unanswered,
including how much of a $125bn loan package Spain would ask for.
That uncertainty led to losses on Monday in stock markets in Europe
and the US. Bond investors pushed Spain's borrowing costs higher, a
sign of lagging confidence in the country's ability to support its
banks.
The downgrades are a measure of Moody's view on the ability
of the 28 banks to repay their debts. Moody's said the downgrades
stemmed from its lowering of Spain's credit rating by three notches
earlier this month.
A downgrade usually means that banks will have
to pay more for their debt. Investors demand higher interest for
riskier debt, which is what the downgrades represent. However, with
interest rates already at rock-bottom levels, the lower ratings may not
significantly affect the cost of funding for the banks.
Spain formally asked the European Union
on Monday for rescue loans to help clean up its troubled banking
industry. The Spanish economy, the fourth-largest of the 17 countries
that use the euro,
is suffering from the aftershocks of the burst property bubble, which
has devastated families as well as banks. Unemployment is nearly 25%.
The
financial strength of Spain's government hinges on that of the
country's banks. Two-thirds of Spain's government bonds are owned by
Spanish banks, pension funds and insurance companies.
Moody's said in a statement that it was encouraged by the broad measures being introduced by Spain to support its banks.
The credit ratings agency made its move four days after downgrading some of the world's biggest banks,
including Bank of America, JP Morgan Chase and Goldman Sachs,
reflecting concern over their exposure to the violent swings in global
financial markets. Moody's also cut the ratings on seven German and three Austrian banks this month.
The
series of downgrades weren't a surprise. But they come at a time of
great uncertainty in the global economy. Europe's 17-nation currency
union is under threat, the US economy is slowing and the economies of
India, Brazil and China are cooling.
EU leaders are meeting on
Thursday and Friday in Brussels for another summit aimed at reining in
Europe's debt crisis. Greece is looking to renegotiate some of the
budget-cutting measures it has agreed to in exchange for continued
support from international lenders. The summit comes just a week after
Greece's new coalition government was formed following months of
political turmoil and two inconclusive elections.
Spanish
government officials haven't said how much they will seek from the loan
package offered by the EU 9 June. Two international audits last week
found that as much as $77bn could be needed. Spain wants the loans to go
directly to the banks so that the government wouldn't be responsible
for repayment. That idea has met with resistance, however.Steep losses
stung stock markets on both sides of the Atlantic Monday. The Dow Jones
industrial average dropped 138 points to close at 12,502.66, a loss of
1.1%. The broader Standard & Poor's 500 index fell by 1.6%.
Many
analysts believe big banks, including those in the US, would be the
first to feel the hit of a freeze-up in Europe's financial system if
Spain isn't able to convince bond markets that it can rescue its hobbled
banks.
The uncertainty pushed borrowing costs higher for Spain's government. Its stock market plunged 3.7%.
http://www.guardian.co.uk/business/2012/jun/26/moodys-downgrades-credit-ratings-spanish-banks
Tuesday, 26 June 2012
Moody's downgrades credit ratings of 28 Spanish banks
6/26/2012 02:26:00 pm
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