Thread: Fitch Threatens to Downgrade Big US, European Banks

Fitch Threatens to Downgrade Big US, European Banks

Friday, 14 Oct 2011 06:54 AM

Fitch Ratings is reviewing its ratings for Bank of America Corp., Morgan Stanley, Goldman Sachs Group Inc. and five European banks, and may downgrade all of them.

The agency placed a host of ratings for the nation's largest bank, the two largest U.S. investment banks and several European counterparts on "ratings watch negative" on Thursday and said it expects to act soon.

Fitch said it mainly is concerned about how increased uncertainty about market and economic conditions will affect Bank of America, the biggest U.S. bank, measured by deposits.

Fitch said the bank remains highly exposed to the volatile U.S. housing market, which is an issue as long as real estate values remain under pressure and the economy appears to be weakening.

It also is analyzing the Charlotte, N.C.-based bank's risks related to a series of recent lawsuits over the sale of securities backed by soured mortgages, and it's looking at Bank of America's plans for shoring up its capital. Other banks are involved in litigation, but Bank of America was sued for $10 billion by American International Group Inc. in August. Another lawsuit filed last month concerns a total of $57.5 billion in mortgage-backed securities the bank sold to Fannie Mae and Freddie Mac.
After Bank of America reached a deal in another similar lawsuit, Fitch said it kept the bank's ratings steady in a June review. But the new lawsuits — plus ongoing litigation involving many states' attorneys general and other potential legal issues — have raised new concerns.

For Morgan Stanley, Fitch says it is concerned about the New York-based firm's business-model shifts, intended to reduce volatility from traditional investment banking and generate more stable fee income through wealth management services.

For Goldman, also based in New York, Fitch's concerns are based on its wholesale funding profile and its reliance on trading revenue.

Fitch also placed on "ratings watch negative" Britain's Barclays Bank PLC, France's BNP Paribas and Societe Generale, Switzerland's Credit Suisse AG and Germany's Deutsche Bank AG.

The ratings agency said its actions were part of a broad assessment of the ratings for the largest banking institutions in the world, and were not related to any specific earnings information. It expects to consult with each institution and review any additional information they provide.

Fitch separately placed a series of other European banks on review and downgraded UBS AG, U.K's Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC.

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S&P Downgrades Spain on Weak Growth Outlook

Thursday, 13 Oct 2011 07:42 PM

Standard & Poor's cut Spain's credit rating on Friday, sending the euro lower and underlining the challenges facing Europe's big powers as they prepare to meet G-20 counterparts over the euro-zone debt crisis.

S&P, whose move mirrored that by fellow ratings agency Fitch last week, cited high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA-minus from AA.

"S&P underestimates the scope of the unprecedented structural reforms undertaken, which will obviously take time to bear fruit," Spain's Treasury said in a statement for investors on Friday.

Spanish unemployment, running at 21 percent, is the highest in the European Union, reflecting a stagnant economy, the collapse of a decade-long housing boom and cuts aimed at reeling in a public sector deficit which reached 11.1 percent of GDP in 2009.

High yields on Spanish government bonds point to concerns that it could be the next euro zone economy to require a Greece-style bailout and despite an unpopular austerity program, doubts remain that Spain will meet its deficit target of 6 percent of GDP this year.

Furthermore, the decision to shelve Spain's multi-billion-euro privatization plans, mainly due to tough market conditions, has deprived the state of much needed revenues to cut borrowings and leaves little room for maneuver in its public finances.

A senior official told the Financial Times on Friday that meeting the 6 percent deficit target will be "difficult."

"And if the (2011) deficit is above 6.5 percent, it's worrying," the official said.

S&P announced the downgrade as finance ministers and central bank chiefs from the world's 20 biggest economies were due to meet later on Friday in Paris amid pressure to find an urgent and convincing solution to the deepening debt crisis.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.

It also noted the "incomplete state" of labor market reform and the likelihood of further asset deterioration for Spain's banks, and downgraded its forecast for Spanish economic growth in 2012 to about 1 percent, from the 1.5 percent it forecast in February.

Juergen Michels, economist at Citi in London, said the market was still wary of developments in Spain's regional public finances, and was aware that fiscal problems would not disappear any time soon.

The spread on Spanish 10-year government bond yields versus their German counterpart was little changed compared to Thursday, while Spain's blue chip index was also hardly affected by the rating cut.

JOB DILEMMA

A botched labor market reform in 2010 did little to alleviate joblessness that is concentrated mainly amongst younger Spaniards, and a new government after November 20 general elections will be under pressure to tackle the issue.

The centre-right People's Party is expected to win the election easily and deepen austerity measures but they have shied away from presenting specific policy measures for fear of eroding public support.

Like Fitch, which also now rates Spain at AA-minus, S&P signaled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5 percent contraction.

The euro dipped in Asian trade after the downgrade, though it still remained on track for its biggest weekly rally since January. It last traded at $1.3753 , having shed around a third of cent.

Finance chiefs from outside the euro zone are expected to speak frankly when they meet their European counterparts at Friday's G20 meeting, given impatience growing over the crisis and its implications for the rest of the world.

Canadian Finance Minister Jim Flaherty set the tone late on Thursday, telling reporters before leaving Ottawa that euro zone actions were short of what was needed.

On Thursday, Fitch cut credit ratings or signaled possible downgrades for several major European banks. It downgraded UBS, Lloyd's Banking and Royal Bank of Scotland. It also placed Barclays Bank, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale on watch negative.

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