Moodys

The Moody’s Corporation (NYSE:MCO) downgrade of Italian banks is all over the news this morning.

F.i.

Before going into panic hearing that 26 Italian banks have been downgraded one should realize:

1)      There are comparatively many smaller Italian banks.

2)      The 5 major bank groups have about half the assets.

3)      The Italian banking sector is and has for some time been in a consolidation – but slowly.

The down grade is between one and four notches.

The limiting factors to the downgrades are according to Moody’s:

a)      The liquidity offered by the ECB reduces short term default risk.

b)      Some others have raised the capital level.

The vulnerabilities of the Italian are particularly according to Moody’s:

A)     Particularly to deterioration of credit quality.

B)      No access to the loan market.

C)      Moody’s ax on the ratings of Italian banks downgraded the ratings of 26 institutions

Some of the worst banks in Europe.

Offering my divine insight on a very limited base of facts:

I do foresee considerable problems with a highly atomized sector, where there probably are considerable crossholdings: Note the recapitalization which one could suspect being: “I buy a million of Your shares, if You buy a million of mine!” The relatively slow progress of consolidation indicates a real maze of crisscrossing of not only share and equity, but also of credits of all maturities.

From the few personal observations I have: Irresponsible banks are a debased dime a score; but one small bar owner was asked by the bank if he wouldn’t consider borrowing? The bar is a very modest place on a mountain top (lovely view) of definitely local and rural clientele. He had the good sense to refuse.

To me the really big risk is the sheer workload involved in consolidating failed banks – you only have so many qualified bank inspection officials (though the professional standard is generally ranged from simpletons to downright idiots – not only in Italy). With Italian paperwork in mind that is about the worst combination. F.i. cleaning up a bank like Bankía in Spain, that is a 1½ year merger of 7-8 failed banks is bad enough (terrible actually); but try a factor four or five in Italy.