The Moody’s Corporation (NYSE:MCO) downgrade.
Downgrades by rating agencies are a symptom rather than a cause. References from your mother are generally not conclusive in a job application; but when can’t even pay people to say something nice about you – then there probably isn’t very nice things to say.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
The implication is that a credit rating is the best possible reference – in the sense, that somebody has for money really done their utmost to emphasise the positive – how useful to anybody it is, that is quite a different matter. True the Spanish and Italian banks have been given a slap in the face – but at least they take the wallop.
What has been missed is that the Danish banks – with Danske Bank as the most prominent – have generally broken off cooperation with Moody’s when the saliva dripping fawning stopped. SparNord said: “We don’t understand a fr***ing thing!”
The reader is perhaps less astonished.
Let’s peruse the reasoning behind the downgrades as published by El País
1) Adverse operating condition. Drop back into recession, the continued real estate crisis and the persistent high unemployment.
2) The low solvency of Spain as a country with the resulting diminished ability to support the banks.
3) The rapidly deteriorating credit quality in real estate with increasing loans and the possible extension to other sectors.
4) The difficulty in accessing the international money market due to the continued investor doubts about the state.
The banks increased impairments, the ECB liquidity and the state support has been eclipsed by the assets deterioration, the bottom line results and capital positions. (Translation: The banks have not taken enough losses and not time with the downhill acceleration).
One thing is that the drops are generally 3 drops to a whisker above the B’s which is called satisfactory in Moody’s terminology – but in plain English is pretty bad and just a notch over downright terrible.
The important point is that the big trans-regional banks such as Santander, BBVA are hit by three clicks down – the rest of the banks were generally already splashing in the toilet. What are now doubted are both the ability and the willingness of the Spanish State to keep propping them up!
I have earlier discussed the Italian banks:
The headline could be construed as misleading. It isn’t really: No doubt the Italian banks are trash; but the structure of the Italian banks will make a reconstruction take longer.
The soothing side of it is that there is a plan from the EU – and it is proceeding. Italy is in a slightly different position as it seems that the deficit isn’t that scary – the debt is, but the deficit should – with a bit of bloodletting – be manageable. But the banks will hardly survive the operation.
On this background the firing of Moody’s by the major Danish banks is sinister: The classification as “systematically important” is not what it used to be!
I have earlier gone into some details about the techniques applied by the bank inspections (in Denmark). They are important, as they are European Union standards. The banks will be forced to impairments and the different countries will have to answer for their banks. If a country cannot lift the responsibility on its own, the ECB will step in; but on conditions to save the state in question, not their banks!
Just look what happened to Bankía! Unceremoniously nationalised – it did not go bankrupt, but share- and stakeholders lost every penny.
Can Spain lift the burden? That is the question for the time being – Moody’s have their doubt. If the ECB is to step in and reconstruct the Spanish banks – through the Spanish CB they will. Please note, that the ECB has offered hands on assistance of how to deal with banks on a managerial level – and Spain will take that help, they asked for it. To be quite honest: It something of a mystery why they keep quoting Spanish (indeed European) banks on the stock exchange.
In 2008 the governments supported the banks, but left it pretty much to the banks themselves to sort things out. They didn’t and this time around there is no more “Mr. Nice Guy”.
The banks still don’t get it: There is a new sheriff in town.
The major Danish banks pout and sulk; but let’s check them against the Moody’s criteria:
1) Adverse operating conditions? Maybe slightly better on the unemployment; but an unresolved agricultural sector in financial – if not production – trouble. The recent world market price increases will not be enough. But yes – check.
2) The solvency of Denmark is quite good, but then the country hasn’t explicitly taken over the housing debt – it rests squarely with the mortgage banks and their owner banks. Double check.
3) Deteriorating credit quality – check.
4) Access to the international credit market – check. The CB has – within since March – extended emergency credit to the mortgage banks (directly and indirectly) of 55-60 bio. DKK – we are not talking bridging loans to cover a temporary embarrassment – they are 3 year loans at distress rates.
What does set Danske Bank apart from the Spanish banks qualitatively is that Denmark is not (officially) a member of the EUR. That is hardly to the advantage of the Danish banks as the Danish Central Bank will have to proceed with greater brutality towards the banks.
One should note that (denied) rumours have surfaced that Angela Merkel should have “suggested” that the Greeks voted on continued membership of the Euro as a referendum in connection with re-enactment of the election farce. Is Greece going to withdraw from the Euro or is she going to be kicked out? Negotiations are over!
Self-pitying whine is over: Danske Bank should take heed – and the other Danish banks as well. Neither banks nor states will be allowed to endanger the economic future of Europe. The “Nanny-State” is – if not dead – then in failing health.