Chillin' out till it needs to be funded
The 15 banks downgraded by Moodys are being celebrated in the markets with the Moodys threat of a three notch downgrade for Morgan Stanley esp working to the MS swirl in the stock markets after it landed a Baa1. JP Morgan also got a two notch downgrade but high scores on many of the released commentary nuggets like a well diversified business
UBS and Credit Suisse did get a three notch downgrade each but exposure to Global Capital Markets and liquidity concerns did not seem too important for the banks on the whole and so Financials are enjoying a reprieve on the market. However, it is difficult to quantify what would happen if the banks continue to function without a global clearing house of derivatives and they continue to carry $40-60 B at a minimum in derivatives notionals which are not part of the balance sheet. (“significant exposure to volatility and risk of outsized losses”) Moodys’ also objected to the banks’ dependence on short term borrowings to fund the balance sheet, much the cause of the collateral damage in 2008. Borrowing costs for banks are however likely to remain stable.
Citi and Bank of America landed with near junk ratings (NYT) The downgrades do come at a time when banks have shown that getting to a double digit return on equity is the biggest challenge facing the industry thru the next decade. However with banks having doubled their Capital levels at Bank of america for example in these three years it may have been time for recognising the better safety implied in banks today and the ratings continue to be easy targets for having been a political play on part of “independent” rating agencies. some of the seminal expectations from rating agencies’ would have been to see how JP Morgan actually managed to convert the toughest illiquid derivatives position into a minor loss of EPS in the run up to the downgrades. However as that is likely to earn the agency points for having censured the bank, the same has not been quantified.
RBS continues to rank above BofA as it is unable to find buyers for most of the European business, Barclays ranks just above Morgan Stanley at A3 and HSBC was also downgraded on derivatives exposure but remained AA3
France, Germany, Italy and Spain get together in Rome on eve of the second Euro semis between Spain and France. Germany and France need more room at the top and bailout beneficiaries look to becoming important part of bailout governance itself especially for policy decisions but then we are likely making too much of it with German contribution still mattering the most and the Eurozone Economics having rubbed off on Germany in the most recent data, Germany is likely to stay even more cautious. we posit that a calendar for a Banking Union and esp. extra sovereign funding for the union (Eurobonds) are unlikely in this edition of the Summit