Moody's may lower ratings of EU banks' subordinated debt

SYDNEY / HONG KONG - 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 on Tuesday. 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. US President Barack Obama has 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 euro was little changed after the Moody's announcement, trading at $1.3333 as of 9:15 am in London from $1.3320 on Monday in New York.

BNP Paribas, UniCredit

Moody's said the review will include banks such as France's biggest lenders BNP Paribas SA and Societe Generale SA, Italy's UniCredit SpA, and Spain's Banco Santander SA. Zurich-based Credit Suisse AG and UBS AG 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 United States, Obama told reporters after meeting on Monday with European Union President Herman Van Rompuy and European Commission President Jose Barroso. Finance chiefs from the 17-member eurozone gathered in Brussels on Tuesday 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 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 on Monday that it had 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 by 43 percent.

'Stark trade-off'

"Policymakers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders," Moody's said on Tuesday.

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 Friday from 336 on Oct 31, Bank of America Merrill Lynch's EUR Corporates Banking index shows.

Bloomberg News

(China Daily 11/30/2011 page16)