Wednesday, 5 October 2011

Moody's downgrade Italian bonds

Moody's, the credit rating agency, has been busy. The agency cut Italy's government bond ratings yesterday, this time by three notches to A2. Reasons cited include long-term funding risks for states in the Eurozone and high levels of public debt. While this is the first downgrade of Italian bonds for many years, the move parallels recent activity by Standard and Poor's who recently downgraded Italian sovereign debt to single A. The ratings from the two CRAs now equate with each other, and both have a negative outlook, meaning that further downgrades could follow. While the downgrade from Standard and Poor's comprised a thinly veiled warning about the political leadership of the country, that of Moody's appears to focus less heavily on the antics of Berlusconi and more on the Eurozone banking and sovereign crises.
Many large French and German banks are heavily exposed to Italy, and the downward revision of that country's sovereign debt will only fuel fears that the sovereign debt crisis in Europe is morphing into a second banking crisis.
Also on Tuesday, Moody's placed the ratings of seven Hungarian banks (OTP Bank NyRt, OTP Mortgage Bank, K&H Bank, Budapest Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank) on review for possible downgrade. The move follows the approval of a law in that country that would allow foreign currency mortgage borrowers to repay their loans in full at exchange rates falling well short of current market rates. Moody's cites that this will add potential stress to a banking system "already under significant pressure". Around 80% of Hungarian banks are owned by foreign banks.

This morning, Moody's has also placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group. The liquidity position of the Group, along with wider concerns about the state of the market is cited as reasons. Further details are available here.

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