Concerns that governments are less likely to come to the rescue of financial institutions prompted Fitch credit ratings agency to downgrade its outlook for Britain's Royal Bank of Scotland Group PLC, Lloyds Banking Group and Swiss lender UBS AG on Thursday. Fitch also said it is reviewing the ratings of a host of European lenders, citing ongoing exposure to sovereign-debt in peripheral Europe and sluggish economic growth prospects. The costs of additional bank regulation and political pressure to reduce state support for banks continue to pose challenges to lenders, Fitch said. Fitch is the second major credit rating agency in less than a week to slash its ratings of Royal Bank of Scotland and Lloyds. Last week, Moody's cut its ratings on the two U.K. banks for the same reason. The moves follow similar actions taken against Italian lenders. Fitch also put Barclays on notice for a possible downgrade, but the British arms of HSBC PLC and Spain's Banco Santander SA were unaffected. France's BNP Paribas and Societe Generale were also put on negative ratings watches, along with Credit Suisse, Deutsche Bank and Rabobank. U.S.-based Morgan Stanley and Goldman Sachs rounded out the banks put on negative ratings watch. Fitch said it expects to make a decision on possible ratings downgrades "within a short time frame and take corresponding rating actions where warranted." At least 66 of Europe’s biggest banks would fail a revised European Union stress test and need to raise about 220 billion euros ($302.3 billion) of capital, Credit Suisse AG analysts said. Royal Bank of Scotland Group Plc, Deutsche Bank AG and BNP Paribas SA would need to the most, a combined total of about 47 billion euros, analysts led by Carla Antunes-Silva wrote in a note to clients today. Societe Generale SA and Barclays Plc would each need about 13 billion euros of fresh capital. Eight banks out of the 90 tested failed the European Banking Authority’s July 15 stress test, with a combined capital shortfall of 2.5 billion euros.
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Friday, October 14, 2011
Concerns that governments are less likely to come to the rescue of financial institutions prompted Fitch credit ratings agency to downgrade its outlook for Britain's Royal Bank of Scotland Group PLC, Lloyds Banking Group and Swiss lender UBS AG on Thursday. Fitch also said it is reviewing the ratings of a host of European lenders, citing ongoing exposure to sovereign-debt in peripheral Europe and sluggish economic growth prospects. The costs of additional bank regulation and political pressure to reduce state support for banks continue to pose challenges to lenders, Fitch said. Fitch is the second major credit rating agency in less than a week to slash its ratings of Royal Bank of Scotland and Lloyds. Last week, Moody's cut its ratings on the two U.K. banks for the same reason. The moves follow similar actions taken against Italian lenders. Fitch also put Barclays on notice for a possible downgrade, but the British arms of HSBC PLC and Spain's Banco Santander SA were unaffected. France's BNP Paribas and Societe Generale were also put on negative ratings watches, along with Credit Suisse, Deutsche Bank and Rabobank. U.S.-based Morgan Stanley and Goldman Sachs rounded out the banks put on negative ratings watch. Fitch said it expects to make a decision on possible ratings downgrades "within a short time frame and take corresponding rating actions where warranted." At least 66 of Europe’s biggest banks would fail a revised European Union stress test and need to raise about 220 billion euros ($302.3 billion) of capital, Credit Suisse AG analysts said. Royal Bank of Scotland Group Plc, Deutsche Bank AG and BNP Paribas SA would need to the most, a combined total of about 47 billion euros, analysts led by Carla Antunes-Silva wrote in a note to clients today. Societe Generale SA and Barclays Plc would each need about 13 billion euros of fresh capital. Eight banks out of the 90 tested failed the European Banking Authority’s July 15 stress test, with a combined capital shortfall of 2.5 billion euros.
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The Socialist government of Prime Minister José Luis RodrÃguez Zapatero won praise last year for measures that let it cut a budget deficit equal to around 11% of gross domestic product in 2009 to just over 9% in 2010. These steps, plus politically difficult overhauls of Spain's labor market and pensions system, helped shore up investor confidence, setting the country apart from its fiscally frail peers.
But this year, as the European debt crisis deepens and global growth slows, Spain could follow in the footsteps of Greece and Portugal, which have already warned their deficit-cutting efforts have gone off track. On Thursday, Standard & Poor's downgraded Spain by one notch, in the latest blow to its status.
Euro-zone governments are stumbling toward what they hope will be a solution to what Poland's finance minister, Jacek Rostowski, described Thursday as the "catastrophic risks" facing the currency union.
The crisis, as described by Mr. Rostowski at a forum in Brussels, has developed into the equivalent of a bank run, except, he said, it is "effectively a run on the sovereigns."
"The way to deal with a run is for everybody who might be involved in a run to know what they are facing an ultimate force on the other side," said Mr. Rostowski, an economist whose country doesn't use the common currency.
In most circumstances, countries would counteract such a run by harnessing the firepower of the central bank. But, he said, the European Central Bank has so many obstacles preventing it from acting effectively in these circumstances that "we have to create alternatives to the functioning of the central bank."
That is what the euro zone now appears to be trying to do in time for its summit on Oct. 23. It is moving toward action that parallels what the 19th-century writer Walter Bagehot urged the authorities to do in a banking crisis: Let the troubled bank fail, and protect the banking system by making plentiful liquidity available to other banks.
However, greater uncertainty would depress domestic demand, they added. The debt crisis, if it escalates, would force the forecasters to revise down their expectations and an outright recession could not be ruled out.
But they warned: "The debt crisis in Europe is threatening to become a banking crisis, which is increasingly weighing on the German economy too.
"The strongly increased uncertainty will dampen domestic demand and foreign trade will probably no longer contribute to the expansion due to the difficult situation of important trade partners."
They also cautioned the European Central Bank over its purchase in the secondary market of government bonds, arguing that it would be much better to cut interest rates in order to tackle the eurozone crisis.
The ECB, which has twice raised borrowing costs this year to 1.5%, is now likely to reverse these increases over the coming months but Mario Draghi, its incoming president, may persuade a majority on the governing council to stay its hand until the new year.
The experts, however, made plain they do not expect a repeat of the economic collapse that followed the bankruptcy of Lehman Brothers in the autumn of 2008. "Contagion on the scale seen after that bankruptcy is unlikely," they said.
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