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Moody’s Downgrades UK Banks; Economy Shrugs

Posted on the 07 October 2011 by Periscope @periscopepost

Moody’s downgrades UK banks; economy shrugs

Credit ratings agency Moody's logo

Are we all doomed again? Credit ratings agency Moody’s has raised alarm by downgrading the credit ratings of some banks in England to Aa3 (just under Italy’s, which is Aa2. Check out Chartsbin for a map of Moody’s credit ratings.) The banks include Lloyds TSB, Royal Bank of Scotland and Santander. The government holds stakes in the first two (82 percent and 40 percent, respectively.) The Financial Times reports that Whitehall is worried that it might have to inject more capital into RBS.

Moody’s Friday morning announcement came less than 24 hours after Mervyn King, head of the Bank of England, said we were facing the worst financial crisis ever and as more money is pumped into the economy via Quantitative Easing. This is Money reported that investors have “shrugged off” the downgrading, as it “reflects the agency’s view that the government is less likely to bail out the UK banks, rather than serving as a judgment on their balance sheet strength.”

The downgrading means, according to Moody’s own document, that they are “judged to be of very high quality and are subject to very low credit risk.” It’s that insidious number 3, though, that holds the sting – that shows the banks are at the bottom of that particular slice, only a whisker away from A, which is upper-medium.

Banks are liquid. Chancellor of the Exchequer George Osborne told BBC Radio 4′s Today programme that he was “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.” The comments were picked up and quoted by Politicshome, which made the Moody’s downgrade its lead story on Friday morning.  James White on The Daily Mail suggested that downgrade would make it more expensive for financial institutions to borrow.

“People ask me: ‘How are you going to avoid Britain and the British taxpayer bailing out banks in the future?’ This government is taking steps to do that. And therefore credit rating agencies and others will say these banks have got to show that they can pay their way in the world.” George Osborne, also said on Today, quoted in The Guardian.

Pesky ratings agencies! Alex Brummer in The Daily Mail said that the “direct impact” on loan rates would probably be “minimal.” Depositors are protected up to £85,000, but “wise depositors” should spread their nest eggs around, with National Savings bonds and gilts being the best investments. “As for Moody’s why we should believe these rascals I am not quite sure” – they said sup-prime debts were AAA, and America’s now looking to potentially prosecute. We should “bring the axe down on ratings too frequently, undermining their credibility yet again. Remember the story of the boy who cried wolf.”

Don’t panic! Christopher Palmer of Henderson Global Investors, in an interview with CNBC-TV18, said it’s “more like housekeeping,” quoted on MoneycontrolThe Daily Telegraph offered ten tips on how to tell if your bank’s safe, which basically boiled down to: there’s no need to worry.

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