Bankers call Moody’s mass downgrade attack on Italy
Moody's downgrade of 26 Italian banks is the first round of a wave of credit rating cuts that is expected to hit dozens of euro zone lenders, adding to their difficulties in raising funds and exacerbating an existing credit crunch.
The move, which Moody's pinned on a weakening operating environment made worse by Prime Minister Mario Monti's tough austerity cure, came amid growing calls within the euro zone for a shift towards growth after months of strict fiscal discipline.
Pro-growth French President Francois Hollande is likely to press for a counterweight to austerity when he meets German Chancellor Angela Merkel on Tuesday against a backdrop of Greek political instability and a deepening of Spain's banking troubles.
"Moody's decision is an assault against Italy, its companies, its families," said Italian banking lobby ABI. "Once more rating agencies turn out to be a destabilising factor for financial markets with their partial and contradictory statements."
Big business lobby chief Emma Marcegalia said she was concerned by such an "attack against Italy" and ABI head Giuseppe Mussari asked the European Central Bank and other European institutions to ignore the downgrade to avoid heightened funding strains and spiralling sovereign debt woes.
Italian market watchdog Consob, whose chairman has been critical of ratings agencies and of the importance attached to their rating decisions, summoned Moody's in the next few days for questioning on the downgrade.
Moody's move, following its February downgrade of Italy's sovereign rating to A3 from A2, makes the ratings of Italian banks among the weakest in western Europe. Spanish banks, seen as one of the euro zone's weakest links, are next on a hit list that will also reach Germany and France.
While large groups such as Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) have enough international reach and capital to absorb the Moody's downgrade, this is more problematic for smaller lenders such as Banca Monte dei Paschi di Siena (BMPS.MI), which now stands just above "junk" or non-investment grade status.
Repeated rounds of credit rating downgrades have made it harder for weak euro zone banks to borrow, increasing their reliance on ECB funds and prompting them to curb lending and sell assets.
Intesa Sanpaolo, which said on Tuesday it had boosted first-quarter bad loan provisions by 43 per cent from a year ago, said it would have to increase by 2 billion euros the collateral it has to provide in returns for ECB funds.
Low ratings are also scaring off large investors such as money-market managers and pension funds, which often rely on rating agencies' marks to guide their investment strategy.
Ratings agencies were heavily criticised after the 2008 financial crisis and have been under fire again in Europe.
Italy's business community and some regulators have been at the forefront of criticism of the three top agencies: Standard & Poor's and Fitch as well as Moody's. Italian prosecutors have also opened a probe into the three for possible market rigging.
"It is very urgent to review the role of rating agencies and the way they operate. They often come too late. In such volatile market conditions their action is useless if not outrightly damaging," Banca Ifis (IF.MI) head Giovanni Bossi told Reuters.
European Parliament Vice President Roberta Angelilli said the body would soon propose new rules on rating agencies.
"Standard and Poor's and Moody's have a de facto monopoly of the global rating market: it's obvious that there is no competition nor sufficient transparency," she said.
With a focus on retail services and despite having steered away from subprime bonds, Italian banks are considered risky as they suffer from the double-edged sword of growing Italian bond holdings and contracting internal demand.
Italian banks have been big buyers of domestic bonds and their role is vital for the refinancing of Italy's 1.9 trillion euro (RM7.5 trillion) public debt. They upped their holdings of Italian bonds by 9 per cent to 290.54 billion euros in March, when Spanish banks also boosted government bonds purchases.
But their exposure to sovereign risk makes lenders vulnerable while concerns persist about the euro zone integrity.
Tax hikes and tough pension reforms introduced by Monti's government have deepened short-term economic woes in Italy, where the economy contracted by a larger-than-expected 0.8 per cent quarter-on-quarter in the first three months of 2012.
"The rating agencies are a bit fickle, sometimes they attack countries and companies because there is not enough austerity," said BNL Chairman Luigi Abete.
Even though Italian banks met immediate funding needs by scooping 255 billion euros of generous three-year ECB loans offered in two auctions, doubts remain over their longer-term ability to fund themselves if sovereign worries persist.
UBI Banca (UBI.MI), Italy's No.5 bank, said in its earnings release on Tuesday it could not fund itself through the market in the first quarter of 2012. It took 12 billion euros of cheap longer-term ECB funds, enough to meet its needs through 2014.
Intesa, which took 36 billion euros of three-year ECB bonds, said it had already covered 50 per cent of its 2012 maturities and will continue to buy short-term government bonds. — Reuters