Moody’s Signals Possible Cut for Europe Banks

By Jacob Greber and Chitra Somayaji - Nov 29, 2011 4:20 PM GMT+0700
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A pedestrian passes the Unicredit SpA headquarters in Milan, Italy. Photographer: Guiseppe Aresu/Bloomberg

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Banks in 15 European nations, including the largest lenders in France, Italy and Spain, may have their subordinated debt ratings cut by Moody’s Investors Service Inc. to reflect the potential removal of government support.

All subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support were placed on review for downgrade, the ratings company said in a statement today. The subordinated debt may be cut on average by two levels, with the rest lowered by one grade, Moody’s said.

Lenders in Spain, Italy, Austria and France have the most ratings to be reviewed as governments in Europe face limited financial flexibility and consider reducing support to creditors, the rating company said. Moody’s has said that a “rapid escalation” of Europe’s sovereign debt crisis threatens the entire region. U.S. President Barack Obama renewed pressure on European leaders to prevent a dismantling of the euro.

“Systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody’s ratings,” the company said in the statement.

The Bloomberg Europe Banks and Financial Services Index fell 1.7 percent by 10:10 a.m. Central European Time, led by Dexia SA (DEXB), KBC Groep and Raiffeisen Bank International AG. (RBI) The euro was little changed after the Moody’s announcement, trading at $1.3333 as of 9:15 a.m. in London from $1.3320 late yesterday in New York.

BNP Paribas (BNP), UniCredit

Moody’s said the review will include banks such as BNP Paribas SA and Societe Generale SA (GLE), France’s biggest lenders, UniCredit SpA (UCG), Italy’s largest, and Spain’s Banco Santander SA. (SAN) Zurich-based Credit Suisse AG and UBS AG (UBSN) will also be assessed, according to a list of lenders published by Moody’s.

Agreeing on a sufficient response to Europe’s problems is of “huge importance” to the U.S., Obama told reporters after meeting yesterday with European Union President Herman Van Rompuy and European Commission President José Barroso. Finance chiefs from the 17-member euro area will gather in Brussels today to discuss how the European Financial Stability Facility will boost its muscle by insuring sovereign debt with guarantees.

Economists from banks including Morgan Stanley, UBS and Nomura Holdings Inc. (8604) said over the past week that governments and the European Central Bank must step up their response.

Nomura, Japan’s largest brokerage, said in a statement late yesterday that it reduced assets linked to Italy by 83 percent from the end of September, and cut the value of assets linked to Spain by 62 percent. Greek holdings were slashed 43 percent.

‘Stark Trade-Off’

“Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders,” Moody’s said today.

There have also been cases where countries have “faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets,” the statement said.

Banks will cut bond sales by 60 percent in Europe next year as the sovereign debt crisis drives up issuance costs, Societe Generale predicts. Lenders will sell 50 billion euros ($67 billion) of senior notes, down from a euro-era low of 121 billion euros so far this year, according to the French bank.

The extra yield that investors demand to hold European bank bonds is the highest since May 5, 2009, widening to 424 basis points on Nov. 25 from 336 on Oct. 31, Bank of America Merrill Lynch’s EUR Corporates Banking index shows.

To contact the reporter on this story: Jacob Greber in Sydney at jgreber@bloomberg.net; Chitra Somayaji in Hong Kong at csomayaji@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net