Lisbon/London: Debt rating agencies had the knives out for some of Europe's weakened banks yesterday, highlighting the pressure for decisive government action in support for the industry.
Moody's Investors Service downgraded its ratings on nine Portuguese banks, citing the increased asset risk linked to their holdings of Portuguese government debt and the sovereign downgrade of Portugal in July.
The same agency also cut the ratings of two top British banks, citing a likelihood of less state support in a future crisis as Britain sought to reassure investors the sector was well capitalised.
Meanwhile Standard and Poor's downgraded the core banks of Franco-Belgian financial group Dexia — the bank which has come to epitomise the European debt crisis through its unusually large exposure to the debts of the Eurozone's weakest country, Greece.
Rival Fitch placed Dexia bank entities on rating watch negative.
The downgrades come ahead of crucial summit talks tomorrow between German Chancellor Angela Merkel and French President Nicolas Sarkozy and as diplomats detected a split between them over how any strengthening of banks should take place.
Portugal's top listed bank Millennium fell 2.8 per cent on the downgrade news.
Moody's said it expected a further deterioration of Portuguese banks' domestic asset quality due to a weak economic growth outlook and government austerity measures, as well as liquidity strains due to a lack of access to wholesale funding.
Debt-laden Portugal is enacting painful tax hikes and spending cuts under a ¤78 billion (Dh382.66 billion) EU/IMF bailout designed to shore up its public finances and restore investor confidence.
Banks have to boost their capital ratios under the bailout terms after becoming overly dependent on ECB funding. Moody's cut its credit rating on Portugal by four notches to Ba2 in July.
"The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength," the ratings agency said.
The six banks whose standalone ratings and debt and deposit ratings were cut are the state-controlled Caixa Geral de Depositos, top listed bank Millennium, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Caixa Economica Montepio Geral.
Concern grows over need for capital
Britain, with its own currency, sits aloof from the Eurozone sovereign debt crisis itself, but banks had been on review for possible downgrade as part of a trend where state support for lenders dates back to the 2008 crisis. Concern is growing that its banks may need more capital as part of a wider European move to shore up the industry. Ratings agency Moody's cut its rating on Royal Bank of Scotland by two notches, downgraded Lloyds by one notch, and cut its ratings on Santander UK, the UK arm of Spain's Santander , the Co-Operative Bank, Nationwide Building Society and seven other smaller British building societies. UK finance minister George Osborne said Britain's banks remained well-capitalised and in better shape than many of their European rivals.
