Moody’s Corporation (NYSE:MCO) has notified banks that they may be releasing new downgrade updates of some credit ratings. The rating agency said that 17 financial firms were affected by the new downgrades due to their exposure to global markets.
Since February, Moody’s has warned that it may cut the credit rating for firms such as USB AG (USA) (NYSE:UBS), Credit Suisse Group AG (ADR) (NYSE:CS) and Barclays PLC (ADR) (NYSE:BCS). These banks are on watch for a cut due to their heavy European exposure.
The problem with downgrading a company’s credit rating is that it becomes more expensive for them to borrow. So, you could downgrade these European banks but Moody’s would be doing nothing other than hurting those banks. These banks could use additional funds to help offset any losses associated with the European debt crisis. If they get downgraded, it is going to be more difficult for the firms which put even more pressure on Europe and the markets.
However, on Moody’s Corporation (NYSE:MCO) rate cut watch list is quite a few American banks. The reason for these banks to be on a rate cut watch could be their increased exposure to Europe. Additionally, it could have to do with the US’s slumping economic news as of late. Banks could be feeling the pressure from a weak domestic economic environment which would certainly give reason for a Moody’s rate cut.
Moody’s Corporation (NYSE:MCO) began its downgrade campaign on May 14th when the rating agency began cutting ratings of Italian banks. Four days later, Moody’s cut 16 Spanish financial institutions and more recently cut 7 German and 3 Austrian bank ratings on June 6th. Obviously, Moody’s in on a downgrade spree as the company sees lots of pressure on banks in the coming months.
The stock market does not like rate cuts and it can be difficult for a market rally to continue when so many downgrades are being handed out. Downgrades essentially admit there is a problem in a certain region or certain company. Like I said before, rate cuts don’t do anyone much favors other than it makes it more expensive to borrow. Banks need to be able to have access to funds that it can use to stay afloat. If they can’t afford capital, they could end up failing.
The bottom line here is that the markets are already down today but they could be heading lower if Moody’s does decide to downgrade banks today.