January 20, 2022

Fitch Puts British Debt on Review for Downgrade

LONDON — Britain’s economic troubles took a turn for the worse on Friday as Fitch Ratings came a step closer to becoming the second agency to strip the country of its triple-A investment grade.

Fitch put the debt on watch for a possible downgrade just days after the release of gloomy government economic data. The figures showed that British debt would “peak later and at a higher level than previously expected by Fitch,” the agency said on its Web site.

The change came a month after Moody’s Investors Service lowered its investment rating for British debt, knocking it to Aa1 from Aaa, saying that one of the principal factors was the very slow pace of the British recovery.

Fitch said Friday that “the persistently weak performance of U.K. growth, in part due to European growth, has increased uncertainty around the U.K.’s potential output and longer-term trend rate of growth with significant implications for public finances.”

Credit downgrades together with a weaker economic outlook could prompt some holders of British bonds to sell their holdings. Government bonds have benefited from the economic turmoil in the euro zone, which had made them more attractive to foreign investors.

The Fitch announcement followed a gloomy speech by George Osborne, the chancellor of the Exchequer, in Parliament on Wednesday. He said that economic conditions remained difficult and that it would take longer than expected to meet his debt-reduction target.

Citing figures from the Office for Budget Responsibility, an independent economic forecasting group, he said the British economy would grow 0.6 percent this year, half of the 1.2 percent forecast earlier. Growth next year is expected to be 1.8 percent, down from a previous estimate of 2 percent, according to the office.

Public-sector net debt as a percentage of gross domestic product would start falling only in the fiscal year ending in 2018. That is a year later than Mr. Osborne forecast in December, when he pushed the goal back to 2017 from 2016.

To help generate growth, Mr. Osborne pledged to divert some of the proceeds of a far-reaching cost-cutting program to lend to home buyers, helping them with deposits for newly built houses. He is also relying on the Bank of England to keep interest rates low for longer even as inflation continues to hover above the central bank’s 2 percent target.

Mr. Osborne is relying on the Bank of England and the housing market to help create the economic upturn he needs to meet his debt targets.

He played down the importance of the Moody’s downgrade, saying it was just another sign of how important its deficit-cutting strategy was. Moody’s decision was “disappointing news,” he said, but it also showed that “Britain cannot let up dealing with its problems” and that “if we abandon our commitment to deal with that debt problem, then our situation will get very much worse.”

Landon Thomas Jr. contributed reporting.

Article source: http://www.nytimes.com/2013/03/23/business/global/fitch-puts-british-debt-on-review-for-downgrade.html?partner=rss&emc=rss

The Next Crisis for German Banks — Shipping

FRANKFURT — For all the talk about Germany’s financial exposure to Greece, it turns out that some German banks have a problem of more titanic proportions — their vulnerability to the global shipping trade.

Germany’s 10 largest banks have €98 billion, or $128 billion, in outstanding credit or other risks related to the global shipping industry, according to Moody’s Investors Service. That is more than double the value of their holdings of government debt from Greece, Ireland, Italy, Portugal and Spain. And it is more than any other country’s financial exposure to the shipping industry, which is in the fifth year of a recession.

Moreover, German banks bear a generous share of the blame for spawning that recession. By helping to finance and market funds used to build and purchase ships, a popular tax shelter, the banks helped create a glut in large container ships that has led to a collapse in cargo hauling prices worldwide.

Germans grumble chronically about having to pay for Greece’s bad debts, and German policy makers style themselves as guardians of fiscal prudence. But the shipping-related crisis, and the threat it poses to the German economy from billions of euros in bad loans and losses at shipping-related companies, is a reminder that German banks and political leaders also have plenty to answer for.

Shipping’s recession has been overshadowed by the euro zone debt crisis, but it has many of the same causes. They include complex financial products that turned sour, market-distorting government incentives and a gigantic underestimation of risk.

“The container ship market is completely overbuilt,” said Thomas Mattheis, a partner at TPW Todt, an accounting firm in Hamburg that advises clients in the industry. He blamed banks that granted easy credit, cargo companies that ordered too many vessels and investors eager for the tax-free profits that were part of the allure, thanks to German law.

“When you look back you can say they all had a share,” Mr. Mattheis said.

HSH Nordbank in Hamburg, the world’s largest provider of maritime finance, is expected to raise its estimate of potential losses from shipping on Wednesday when it reports quarterly earnings. The bank, owned by local governments and savings banks, has already warned that in coming years it will need to avail itself of €1.3 billion in guarantees offered by Hamburg and the state of Schleswig-Holstein, putting a further strain on taxpayers.

“I have to admit that grave mistakes were made in the years before 2009,” Constantin von Oesterreich, chief executive of HSH, said in an interview published by The Hamburger Abendblatt on Saturday. In October, Mr. von Oesterreich became the bank’s third new chief executive since 2008.

Other German banks that were particularly active in ship finance, including Commerzbank in Frankfurt and NordLB in Hanover, which both rank in the top five globally in that market, have said they have made adequate provisions for losses and will not need any government aid.

Commerzbank, which is partly owned by the German government after a bailout, shut down a unit specializing in ship financing this year and is winding down its holdings. The bank warned in its most recent quarterly report that it would be at least another year before it could sell units that were set up to finance construction of cargo ships with names including “Marseille” and “Palermo.” While larger, relatively new cargo ships sell for tens of millions of dollars, older, smaller ships often fetch only a few million — not much more than the value of the scrap metal.

Exposure to shipping is one reason Moody’s affirmed its negative outlook for German banks last month. In a report, the ratings agency warned that the global shipping industry “faces weakened demand amid sluggish global economic growth and evolving structural overcapacity.” It said money that the 10 largest German banks had lent to the shipping industry equaled 60 percent of their capital, the funds held in reserve for potential losses.

Article source: http://www.nytimes.com/2012/12/05/business/global/the-next-crisis-for-german-banks-isnt-greece-its-shipping.html?partner=rss&emc=rss

DealBook: A Sober New Reality in Credit Downgrades for Banks

Moody's downgraded 15 big banks, noting the changing nature of their Wall Street operations.Mark Lennihan/Associated PressMoody’s downgraded 15 big banks, noting the changing nature of their Wall Street operations. Graphic Graphic: Taken Down a Notch or Two

When a consumer’screditscore drops, it is hard to recover financially. Wall Street firms could face the same fate.

Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all suffered credit ratings cuts on Thursday. The rating agency Moody’s Investors Service said that, even though these banks had moved to strengthen their operations, their core trading businesses contained structural weaknesses.

In other words, the downgrades reflect the new sober era for Wall Street.

SinceMoody’sput the banks on warning in February, the firms have had time to brace themselves and the immediate impact of the cuts is not likely to be drastic. But banking industry analysts say they think Moody’s actions will cause lasting pain.

“It will make life more difficult for the banks over the long run,” said Andrew Ang, a professor of business at Columbia Business School. “The effect of ratings is pervasive.”

Ratings at Bank of America, which owns Merrill Lynch, and Citigroup, which has a large investment bank, were cut to Baa2. At that level, their creditworthiness is at the lower end of the investment grade, just two levels above junk. Morgan Stanley was downgraded to Baa1, three notches above junk, and Goldman was reduced to A3, four notches above junk.

In many ways, those cuts echo investor sentiment about banks with large Wall Street operations. The stocks of Goldman, Morgan Stanley and similar firms trade at valuations that are depressed by historical standards, an indication that investors harbor deep doubts about the industry’s long-term prospects.

But the sharply lower credit ratings may cause more stress in the same areas that prompted the downgrades.

One of those trouble spots is short-term borrowing. Wall Street firms need to finance their operations at a low cost to make profits, so they make heavy use of short-termloansthat last from a few days to a few months.

Since the financial crisis, banks have made great efforts to make this critical financing source safer, partly by backing this debt with higher-quality assets.

Even so, the downgrades could push up the costs of these loans. With a lower credit rating, lenders might think there is a higher probability that the banks won’t repay the money.

“These firms have large amounts of debt that they have to keep rolling over, and they will have to pay more to do that,” Mr. Ang said.

They could also feel the pain in theirderivativesbusiness. Derivatives, financial instruments whose value is linked to prices of bonds and stocks, can be a lucrative for banks, especially when they are specially tailored for the customer on the other side of the trade.

But these clients, to protect themselves, may now demand better terms with downgraded banks, like increased collateral. Wall Street firms would then have to decide whether to give up the business, or go along with client demands and face weaker profits.

“Some banks may have to relax their terms in order to win business,” said Paul Gulberg, a brokerage analyst at Portales Partners.

The downgrade could also widen the chasm in the industry. While most big banks were downgraded, some got hit harder than others. At the high end of the rating spectrum is JPMorgan Chase. Citigroup and Bank of America fall much lower down.

“The downgrades will change the competitive dynamics of Wall Street,” said Mr. Gulberg, who said JPMorgan had been steadily increasing its market share in important businesses over the last several years.

The situation could be especially acute in the derivatives.

To help insulate their profits from a downgrade, many Wall Street firms locate derivatives trades in bank subsidiaries backed by government-insured deposits. As a result, these subsidiaries have higher credit ratings than the parent companies.

Citigroup, Bank of America and JPMorgan Chase have more than 90 percent of their derivatives in such subsidiaries. Morgan Stanley only has 5 percent.

Notably, Moody’s didn’t warn of possible future downgrades for these subsidiaries. But it did say the parent companies had a “negative outlook,” the agency’s way of saying it still had doubts about their creditworthiness.

Given that threat, the banks may try to do as much business as they can in these higher-rated subsidiaries. That could face resistance, especially if bank regulators think it is risky business.

“The banks already have every incentive to use their bank subsidiaries, but it’s even greater after the downgrades,” said Dennis Kelleher, president of Better Markets, a lobbying group that is pushing for stricter financial regulations. “That’s why regulators need to be on guard and scrutinize everything the banks are doing, or moving into, these subsidiaries.”

The downgrades may also intensify competition from outside the traditional players on Wall Street. Asset managers like BlackRock are making inroads, sometimes bypassing Wall Street in the process. Bond trading, a huge source of revenue for firms like JPMorgan, is especially vulnerable.

The downgrades will only help the insurgents. For instance, Moody’s rates BlackRock A1, two notches above Goldman, and one level higher than JPMorgan.

Article source: http://dealbook.nytimes.com/2012/06/22/a-sober-new-reality-in-credit-downgrades-for-banks/?partner=rss&emc=rss

Stocks & Bonds: Rating Agency Warnings Bring Down the Markets

PARIS — The market euphoria over last week’s deal by European leaders to shore up the euro currency union succumbed to a darker mood Monday.

In European trading and on Wall Street, stocks fell sharply after Moody’s Investors Service and the Fitch Ratings agency warned that political efforts to protect the euro had not resolved the immediate dangers of a significant economic downturn in the region and troubles in the banking system.

And the yield, or interest rate, on the 10-year Italian government bond — perhaps the most crucial barometer of the euro crisis — rose to 6.5 percent, heading back into a range that could make it hard for Italy to pay off its staggering debts.

Also pulling down stocks, the chip maker Intel said before trading began in New York that its fourth-quarter revenue would be lower than expected because of supply shortages of hard disk drives, as a result of flood damage to factories in Thailand. Intel now expects fourth-quarter revenue of $13.4 billion to $14 billion, down from a previous forecast of $14.2 billion to $15.2 billion.

Shares of Intel, a component of the Dow, lost 4 percent, to close at $24.

Hank Smith, the chief investment officer for Haverford Trust, said the combination of the Intel announcement and downbeat reassessments of the European summit meeting were too much for investors to digest.

“All of that just breeds uncertainty and I think you are just seeing that reflected in the market,” he said.

Fitch warned Monday that European politicians were taking a “gradualist” approach to creating a true fiscal union among the 17 euro zone member nations — a protracted effort that Fitch said would impose additional economic and financial burdens on the region. “It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond,” the agency said.

Moody’s said it was putting the sovereign ratings of European Union countries on review for a possible downgrade in the coming months. Standard Poor’s issued a similar warning last week, saying it could lower the sterling credit ratings of Germany and France and cut other countries’ credit scores as Europe headed into a probable recession next year.

Cuts in credit ratings for crucial euro zone countries could play havoc with financing European bailout plans.

In United States, the Standard Poor’s 500-stock index was down 1.49 percent, or 18.72 points, to 1,236.47. The Dow Jones industrial average fell 1.34 percent, or 162.87 points, to 12,021.39. The Nasdaq composite index lost 1.31 percent, or 34.59 points, to 2,612.26.

American financial stocks as a group were off more than 3 percent, dragged down by Morgan Stanley’s 6 percent plunge, to $15.38, and Citigroup’s 5 percent drop, to $27.22.

The Treasury’s benchmark 10-year note rose 13/32, to 99 27/32, and the yield fell to 2.02 percent from 2.06 percent late Friday.

In Europe, the Euro Stoxx 50, a barometer of euro zone blue chips, closed down 3.1 percent, while the FTSE 100 in London fell 1.8 percent. The DAX in Frankfurt lost 3.4 percent and the CAC in Paris fell 2.6 percent.

President Nicolas Sarkozy of France acknowledged Monday that a loss of the nation’s triple-A rating could come soon, but said it would not pose an “insurmountable” difficulty. Mr. Sarkozy has made it a priority of his coming presidential campaign to keep the country’s top credit rating, and repeated a pledge to reduce the nation’s debt and deficit without cutting wages and pensions.

Mr. Sarkozy’s rival, the Socialist candidate François Hollande, said Monday that he would try to renegotiate the terms of the European deal struck Friday if he were elected president in May, saying the pact would stifle growth.

With markets and rating agencies expressing disappointment with last week’s Brussels deal, the spotlight returned to the European Central Bank, the only institution with overall responsibility for maintaining the health and integrity of the euro.

Amid last week’s political theater, the central bank took a crucial step to help the biggest European commercial banks by agreeing to provide them with unlimited funds for up to three years.

While that may ease the pressure on the financial system, any further downgrade in the credit rating of European governments could escalate the crisis by making it more expensive for the weakest countries to service their debts. It could also make it more difficult for banks in Italy, Spain and even France to get credit from other banks, causing a potential pullback in lending to consumers and businesses at a time when economic growth is already being squeezed.

Liz Alderman reported from Paris, and Christine Hauser from New York. Reporting was contributed by Jack Ewing from Frankfurt, Stephen Castle from Brussels, and David Jolly from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=4393ffee11b95728445ec48d0ab73e53

Dire Warnings Are Building on European Debt Crisis

The Organization for Economic Cooperation and Development said on Monday that the euro crisis remained “a key risk to the world economy.” The research group, based in Paris, sharply cut its forecasts for wealthy Western countries and cautioned that growth in Europe could come to a standstill.

Hours earlier, Moody’s Investors Service issued its own bleak report on Europe’s sovereign debt crisis. Moody’s, a leading credit ratings agency, warned that the problems could lead multiple countries to default on their debts or leave the euro, which would threaten the credit standing of all 17 European Union countries that use the euro.

Despite the gloomy predictions, stock indexes rose sharply in Europe and Asia as well as on Wall Street, and the euro strengthened, on hopes that European leaders would step up efforts to resolve the crisis.

Finance ministers from the euro zone were to meet Tuesday in Brussels to try to agree on how to increase the firepower of their bailout fund. They also hope to sign off on an 8 billion euro ($10.7 billion) loan installment to prevent Greece from defaulting. A proposal for a Europe-wide solution to the crisis is expected before a meeting of European Union leaders on Dec. 9.

Already, though, the prime ministers of Finland and Luxembourg are voicing alarm over French-German plans to set strict new budget rules for countries that use the euro currency — something Berlin considers a precondition of further steps to save the euro zone.

Meanwhile, although the International Monetary Fund on Monday denied Italian media reports that it was negotiating a bailout loan to Italy, some experts predicted the I.M.F. would soon try to come to Italy’s rescue.

Concerns about the European crisis also hung over a meeting Monday at the White House between President Obama and three European leaders: José Manuel Barroso, the president of the European Commission; Catherine Ashton, the European foreign policy chief; and Herman Van Rompuy, the president of the European Council.

During a White House news briefing, the press secretary, Jay Carney, said that “our position is and has been that it’s critical for Europe to move with force and decisiveness now, particularly with new governments coming into place in Italy, Greece and Spain.”

In Brussels, European officials rejected suggestions that the euro was days away from breaking up, pointing out that countries had completed most of their bond issues, even if the respite would be only a matter of weeks before they had to return to the credit markets.

Belgium had to pay higher interest rates to borrow money in the markets on Monday, illustrating how the country’s failure to form a government had increased concerns about its ability to tackle its debts. The yield on 10-year bonds was 5.57 percent, compared with 4.37 percent in an auction last month.

Concerns are also mounting over Italy, whose borrowing costs continue to soar. In a bond auction Monday, Italy had to pay an interest rate of 7.2 percent to sell 12-year issues — a full 2.7 percentage points higher than the last time it auctioned 12-year bonds. Another Italian bond auction is set for Tuesday.

Over the weekend, Italy had signaled, along with Germany and France, that it was ready to agree on new rules to enforce budget discipline while encouraging more coordination of economic and fiscal policy among the 17 European Union members that use the euro.

On Monday the German Finance Ministry published comments from the finance minister, Wolfgang Schäuble, suggesting that this could be done by amending a protocol of the European Union treaty, though officials said this would still need approval by all 27 members.

An alternative, favored by some French policy makers, is to reach agreement among the 17 euro zone nations outside the framework of the European Union treaty. Some news reports have suggested an even smaller group might be involved.

Liz Alderman reported from Paris and Stephen Castle from Brussels. Steven Erlanger contributed reporting from Paris and Annie Lowrey and Brian Knowlton from Washington.

Article source: http://feeds.nytimes.com/click.phdo?i=a841359a9c3c80849e30d7c9d3a272a9

High Corporate Profits Could Reduce Risk in Junk Bonds

High-yield — often called junk — bonds paid about 8.34 percentage points more than United States Treasury issues of comparable maturity, on average, on Sept. 30. Although that is well under the double-digit point premiums that prevailed at market bottoms during the last decade, specialists say that this may still be a profitable time to consider high-yield mutual funds, which are particularly appropriate for tax-sheltered accounts.

“I think the market is attractive,” said William J. Morgan, senior high-yield portfolio manager for J. P. Morgan Asset Management. Junk bonds were trading as if almost 9 percent of issues will default over the coming year, Mr. Morgan observed, even as Moody’s Investors Service projects that only 1 percent to 2 percent will do so.

“I see high-yield as offering pretty decent value here,” agreed Matt Eagan, co-manager of the Loomis Sayles Bond fund, which invests up to 35 percent of assets in lower-rated securities.

Mr. Eagan noted that despite weak economic growth, American companies are enjoying hefty profits, indicating that they cannot only handle interest and principal payments on their bonds but also can take advantage of today’s low interest rates should they need to refinance.

“The default rate is likely to remain low,” he said, and is quite unlikely to rise much above 5 percent even if the economy skids back into recession. Default rates peaked at more than 10 percent after the 2008 meltdown, in the early 2000s and in the early 1990s.

Investors who cringe at the idea of buying low-quality debt — the BBB rating is generally considered the border with investment-grade bonds — should recognize that it can act as a kind of stabilizing portfolio ballast, some specialists maintain.

“A certain mix of higher-quality and high-yield bonds lowers volatility while boosting and smoothing returns,” Mr. Morgan said.

Major companies, not just start-ups or fringe telecoms, are now among the biggest issuers of high-yield — the likes of Ford Motor Credit, the CIT Group, the Hospital Corporation of America, Ally Bank and Sprint Nextel.

Still, the market for high-yield bonds is highly volatile and subject to periodic bouts of illiquidity like the one that occurred in August. That is when the fund category, which had been posting double-digit returns during the preceding 12 months, suffered its biggest monthly loss — 4.37 percent — since 2008, according to Morningstar. (The high-yield market had a lesser skid in the second half of September.)

PRICES slumped after Standard Poor’s, citing the political stalemate after a rancorous Congressional debt-ceiling debate, cut the United States’ credit rating. High-yield investors are very attuned to talk of defaults, but the market also suffered from the European financial turmoil and even the effects of the Japanese tsunami.

“The market had a mass anxiety attack, as all risk assets did,” said Mark Vaselkiv, manager of the T. Rowe Price High Yield fund.

The performance of high-yield bonds, unlike that of investment-grade issues, is very sensitive to the stock market and the economy. Good times indicate that borrowers have a greater ability to service debt, which is far more important to high-yield buyers than the rising interest rates that typically accompany faster growth and that depress the prices of better-quality bonds.

The risk of rising rates, in fact, is limited for high-yield bonds because they almost always come due in 5 to 10 years, compared with 30 years or more for most other corporate bonds. Moreover, their high interest rates provide a cushion against falling prices in a rate upswing. “High-yield will outperform when interest rates go up,” Mr. Morgan said.

Many specialists say the only sensible way for ordinary investors to buy high-yield debt is through mutual funds — both to obtain essential diversification and to avoid being victimized by wide gaps between buying and selling prices in a market that may have relatively little activity.

Retail investors in individual bonds are taking big risks, partly because of the likelihood of unfavorable execution of orders, Mr. Vaselkiv said.

Jeff Tjornehoj, a senior research analyst at Lipper, said that one excellent fund was Fidelity Capital and Income, because of consistent long-term performance, tax efficiency and annual expenses of a reasonable 0.76 percent. It returned 7 percent, annualized, in the five years through Sept. 30 but lost 10.8 percent in the quarter, according to Morningstar. Some 43 percent of its portfolio is in bonds rated B, and 12 percent are rated CCC or below; 17 percent of the fund is invested in stocks.

He said the Vanguard High-Yield Corporate fund has been a high-quality “middle of the road” performer with a portfolio averaging a B rating. It returned 3.7 percent in the quarter , while charging just 0.25 percent in expenses, according to Morningstar.

But there is substantial variation among the more than 500 high-yield funds, with some embracing bonds rated CCC or even lower, as well as common and preferred stocks, convertibles or even derivatives.

The unwary may find the junk market downright treacherous, Mr. Tjornehoj cautioned. “The investor must accept greater volatility and a real risk of loss,” he said, pointing to the Oppenheimer Champion Income fund, which lost about four-fifths of its value in 2008 because of heavy losses on credit default swaps and mortgage-backed securities.

Potential buyers should at least check a fund’s portfolio to make sure it isn’t committed to more low-quality risk than they want and isn’t overly concentrated in certain industries. Good credit analysis by fund managers should uncover issues that are candidates for a ratings upgrade.

Zane E. Brown, a fixed-income strategist at Lord Abbett, noted that gambling, leisure and automotive companies are frequent high-yield borrowers, which could lead to unbalanced fund portfolios if such companies are overrepresented. He now frowns on the bonds of home builders and companies in the paper, publishing and printing industries because, he says, their prospects are generally poor.

While defaults are the biggest hazard in the junk market, analysts also try to predict how much can be salvaged when they occur. The average recovery has run at 44 percent, Mr. Morgan said.

ALTHOUGH many high-yield managers include a wide variety of securities in their portfolios, Mr. Brown sticks closely to corporate bonds. He avoids foreign government bonds because they are harder to analyze and are subject to sudden political change.

Investors should beware of funds offering the very highest current returns, experts also said. Not only might their holdings be of very low quality, but the managers may be paying premium prices, thereby returning some principal in the guise of interest, Mr. Eagan said.

With these cautions, high-yield may be appealing these days — though not the screaming bargain it proved to be when market liquidity evaporated in 2008. But Mr. Vaselkiv issued a caveat: This market may be good “as long as we don’t go into a double-dip recession,” he said. “It’s really a bet on the U.S. economy.”

Article source: http://feeds.nytimes.com/click.phdo?i=777cfd40f19cb8358abfdf4364db04b0

DealBook: Moody’s Cuts Ratings for 12 British Banks

Moody's Investors Service headquarters in Manhattan.Scott Eells/Bloomberg NewsMoody’s Investors Service headquarters in Manhattan.

6:02 p.m. | Updated

Moody’s Investors Service on Friday downgraded its ratings on 12 British financial institutions, including Lloyds TSB Bank and the Royal Bank of Scotland, saying it thought Prime Minister David Cameron’s government was less likely to provide support for them in the event of failure.

It cut the senior debt and deposit ratings on the 12 lenders, citing its “reassessment of the support environment in the U.K., which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support by one to three notches for five larger, more systemically important financial institutions.”

Both Lloyds TSB Bank and Royal Bank of Scotland were bailed out by taxpayers during the 2008 crisis and most likely would have collapsed without that support.

Mr. Cameron’s chancellor of the Exchequer, George Osborne, said the downgrades were expected because the government was pursuing the right policy.

“As I understand it,” Mr. Osborne told BBC radio, “one of the reasons they’re doing this is that they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain, in other words trying to deal with the ‘too big to fail’ problem.”

He said the Vickers Commission report, which called in September for the separation of retail and investment banking activities, demonstrated that the government was serious about overhauling the industry.

“In other words,” he told the BBC, “people ask me, how are you going to avoid Britain and the British taxpayer bailing out the banks in the future? This government is taking steps to do that, and therefore credit ratings agencies and others will say, ‘Well actually, these banks have got to show that they can pay their way in the world.’ ”

Shares of Royal Bank of Scotland fell 3 percent in London, while Lloyds TSB Banking fell 3.4 percent.

Mr. Cameron added that he was “confident that British banks are well capitalized; they’re liquid; they’re not experiencing the problems that some of the banks in the euro zone are experiencing at the moment.”

Moody’s said British banks’ ratings continued to receive “up to three notches of uplift” from expectations of support, but “it is more likely now to allow smaller institutions to fail if they become financially troubled.” It noted that the Bank of England, the Financial Services Authority and the Treasury had all made it clear that in the future the government would be more likely “to make greater use of its resolution tools to allow burden-sharing with senior bondholders.”

It stressed that the ratings cuts “do not reflect a deterioration in the financial strength of the banking system or that of the government.”

It cut Lloyds TSB Bank and Santander U.K. to A1 from Aa3, Co-Operative Bank to A3 from A2 and R.B.S. and Nationwide Building Society to A2 from Aa3. It cut seven smaller institutions, as well.

Shares of Royal Bank of Scotland fell 3 percent in London, while Lloyds TSB Banking stock fell 3.4 percent.

Moody’s said four British banks continued to benefit from “a very high likelihood of support” from the government, including Barclays and HSBC Holdings, as well as Lloyds TSB and the Royal Bank of Scotland. It did not change its ratings of Barclays and HSBC.

Article source: http://feeds.nytimes.com/click.phdo?i=6b9088182b9a15bf9c6938d4caecb379

France Expresses Confidence in Banks After Downgrades

The latest attempt at reassurance about the health of French banks came as the leaders of France and Germany prepared to speak with their Greek counterpart amid worries that Athens may default on its heavy debt load.

European stocks and the euro got a lift after the head of the European Commission said he would present options soon for the introduction of euro area bonds — the latest effort by European leaders to show they are trying to strengthen the foundations of their monetary union.

Moody’s Investors Service downgraded two of France’s biggest banks Wednesday, Société Générale, Crédit Agricole, citing their exposure to the Greek economy and the fragile state of bank financing markets. It kept a third, BNP Paribas, under review.

The cuts had been widely anticipated by investors but nevertheless sparked knee-jerk drops in the euro and Asian stock markets, both of which had already been on the back foot earlier in the Asian trading day.

But the downgrades were less severe than many analysts had anticipated, and by midday in Europe, the Euro Stoxx 50 index of euro zone blue chips was up around 2 percent and the FTSE 100 in London was up around 1.5 percent.

In Japan, the Nikkei 225 index closed down 1.1 percent, but the Hang Seng in Hong Kong closed up 0.1 percent.

The euro, which had been hovering at around the mid-$1.36 level before news of the downgrades, slipped half a cent initially but then rallied to above $1.37.

The Bank of France governor, Christian Noyer, called the ratings cuts “good news” because they were less than expected. In a radio interview, he also said it would make “no sense” to nationalize any French bank, calling such talk “surreal.”

Société Générale, BNP Paribas and Crédit Agricole are considered integral actors in the French economy, lending billions of euros to businesses and individuals, and the government has said it will never let them any of them fail.

In its report, Moody’s expressed concern over the French banks’ reliance on wholesale funding markets given the “potentially persistent fragility in the bank financing markets.” Moody’s also highlighted “structural challenges to banks’ funding and liquidity profiles,” as nervousness about the exposure of European banks to a potential Greek default make it harder for banks to obtain funding.

A day after BNP Paribas was forced to deny a report that U.S. banks are pulling back on lending to it, Moody’s left its rating at Aa2, saying it had “an adequate cushion to support its Greek, Portuguese and Irish exposure.” But it said the bank would remain on review for a possible downgrade.

“I can only imagine that the bank is fighting very hard with the agency to avoid a downgrade,” Gary Jenkins, a the head of fixed income analysis at Evolution Securities, said in a note. Moody’s already rates the bank at the same level as Standard and Poor’s, he noted, “so any cut would result in a new low rating.”

BNP Paribas said on its website that it planned to cut its risk-weighted assets by about €70 billion, or $95.7 billion, and improve its Tier 1 capital ratio — a common measure of banks’ strength — to 9 percent by the start of 2013.

Analysts say one possible solution to Europe’s crisis is the creation of euro bonds, a bond that would be jointly backed by countries in the euro union. Such an instrument would make it harder for investors to attack the individual bonds of countries with tattered finances, like Greece or Italy.

Germany, whose bonds are considered rock-solid now, has been opposed to such a move because it would likely would face higher borrowing costs itself. Countries also would have to agree to relinquish a degree of sovereignty, and the whole process would face enormous political hurdles if changes to the treaty that established the euro are required.

In a speech to the European Parliament on Wednesday, the European Commission president José Manuel Barroso suggested, however, that he would suggest ways under which such bonds could be issued without changing the treaty, although other options would mean treaty change.

“But we must be honest,” he added. “This will not bring an immediate solution for all the problems we face.”

The biggest immediate problem is Greece, which has struggled to meet the terms of an agreement struck in July for new emergency funding, as economic growth slows after nearly two years of harsh austerity.

President Nicolas Sarkozy of France and the German Chancellor Angela Merkel were scheduled to hold a video conference call Wednesday evening with the embattled Greek prime minister, George Papandreou. The announcement could portend yet another restructuring of Greek debt to stave off a default.

The prospect of a Greek default, which would shake the euro zone to its core, was also sure to be discussed at a meeting Friday of finance ministers from all 27 European Union nations. The U.S. Treasury Secretary Timothy Geithner also planned to attend the meeting, underscoring concerns about the impact of Europe’s debt crisis on the United States.

In Beijing, the Chinese Prime Minister Wen Jiabao expressed his support for Europe at a World Economic Forum event Wednesday.

“What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further,” he said, according to Reuters. “We’ve said countless times that China is willing to give a helping hand and we’ll continue to invest there.”

Stephen Castle contributed reporting from Brussels.

Article source: http://feeds.nytimes.com/click.phdo?i=837b98f6535db3f9cc0c6399433d7e99

Markets Slip in Asia and Europe Over Debt Woes

HONG KONG — Stock markets tumbled across the Asia-Pacific region and in Europe on Wednesday and the price of gold shot up as investors around the globe remained nervous about the debt problems in the United States and Europe.

Several leading markets in Asia dropped 2 percent or more, showing that the region’s largely positive economic outlook is doing little to insulate its stocks from the jitters that have battered global markets this year.

The Kospi in South Korea closed 2.6 percent lower, in Australia, the S.P./ASX 200 shed 2.3 percent and in Taiwan, the Taiex sagged 1.5 percent.

In Japan, the Nikkei 225 index fell 2.1 percent to 9,637.14 points.

The Hang Seng in Hong Kong and the Straits Times in Singapore were about 2 percent lower by midafternoon.

And key indexes in Europe were more than 1 percent lower soon after the open.

By contrast, gold, traditionally seen as a safe investment in times of uncertainty, spiked to yet another nominal record high of $1,671 per ounce.

The stock market moves followed a similarly dismal day for Wall Street on Tuesday, as investors once again became worried about the ability of several European countries to meet their debt obligations, and took in the fact that the compromise over the U.S. debt ceiling did not erase the risk of a ratings downgrade.

Moody’s Investors Service and Fitch Ratings hammered home the latter point on Tuesday. Both agencies reaffirmed their triple-A rating for the United States, but Moody’s put a negative outlook on its rating
, a sign of a possible downgrade further down the line. It warned that further fiscal consolidation would probably be needed and that any slowing in U.S. economic growth also would pose a risk.

Fitch echoed the caution, saying that while the debt ceiling agreement reached in Washington was an important first step, it was “not the end of the process toward putting in place a credible plan to reduce the budget deficit to a level that would secure the United States’ AAA status over the medium-term.”

The U.S. debt issue, and the possibility of a downgrade to a credit rating that had once been deemed bulletproof, has caused widespread concern among analysts and policy makers, especially in those nations that hold a high level of U.S. debt.

Analysts at Bank of America Merrill Lynch earlier this week titled a research note on the U.S. debt deal as a “stay of execution,” and Barclays Capital economists noted in a report on Wednesday that while the political wrangling prior to debt ceiling agreement may be over, “the fundamental story underlying U.S. fiscal accounts and debt profile remains.”

Reflecting the concerns among holders of U.S. Treasuries, Zhou Xiaochuan, the governor of the Chinese central bank, on Wednesday said the People’s Bank of China would closely monitor U.S. efforts to tackle its debt.

As the United States’ biggest foreign creditor — holding an estimated $1.5 trillion in U.S. government debt — China is especially sensitive to any developments that could undermine the value of its Treasuries holdings.

“Large fluctuations and uncertainties in this market would undermine the stability of international financial system and hinder global recovery,” the central bank said in a statement on its Web site
. “China hopes the U.S. administration and the Congress would take responsible policy measures to handle its debt issue in light with the interests of the whole world including those of the United States.”

China has signaled that it wants to diversify its holdings by purchasing other assets, but its ability to do so is limited as other markets, like those of European or Japanese debt, are not big or liquid enough to absorb the bulk of China’s foreign-exchange reserves, which are the largest in the world.

The turmoil in the United States has also had painful implications for Japan, which has seen its currency rise to ever-higher levels against a weakening dollar.

The Japanese currency was trading at around 77.2 yen per dollar on Wednesday. That is not far off a record high it hit against the dollar after the devastating earthquake on March 11, and represents a rise of more than 4 percent over the past month alone.

Despite Japan’s poor growth prospects, the yen has been gradually ascending since the global financial crisis, adding pain to Japanese exporters, who have seen their goods become more expensive in overseas markets.

The latest currency movements have prompted a volley of warnings from Japanese policy makers aimed at halting the yen’s ascent.

“Regardless of whether we intervene in the currency market or not, the government wants to do its utmost to prevent the yen from rising further,” Finance Minister Yoshihiko Noda said Wednesday, Reuters reported.

The Japanese central bank, meanwhile, is widely expected to announce further steps to prop up economic growth at the end of a two-day policy meeting on Friday, most likely by expanding a program that buys assets ranging from government bonds to private debt.

Article source: http://www.nytimes.com/2011/08/04/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Business Briefing | International News: Moody’s Puts Spain’s Debt on Review

LONDON — Casting a greater shadow over Spain’s economy, Moody’s Investors Service said Friday that it might cut the country’s credit rating in the coming months because of concerns about rising borrowing costs and the risk that private investors might have to bear some of the pain in any future bailouts.

Moody’s said it would consider cutting Spain’s long-term rating of Aa2 by only one level, which would still be a healthy investment grade.

The euro fell along with Spanish bond prices after the announcement, which comes as European leaders are trying to limit the prospect of the sovereign debt crisis, which has already ensnared Greece, Ireland and Portugal, from spreading to much bigger countries like Italy and Spain, both of which are struggling with weak economies.

Spanish and Italian bonds recovered slightly after a second European bailout for Greece was announced last week, but have dropped again this week as investors fret over whether the package will be sufficient and how long it will take to implement.

In its statement Friday, Moody’s wrote that the latest package could put additional burden on owners of Spanish debt because of the precedent set regarding the role of private bondholders.

As part of that bailout, banks and other private investors are to contribute about $72 billion by swapping their existing debt for new bonds with later maturities.

“Funding costs have been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments,” Moody’s said. “Pressures are likely to increase still further following the announcement of the official package for Greece, which has signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits.”

Moody’s on Wednesday cut the rating for Cyprus and Standard Poor’s reduce its rating for Greece, already in junk territory, by another two notches to CC, saying Greece might still default on its debt.

Moody’s said on Friday that it would weigh any risks to Spain’s debt rating against its relatively low public debt ratio compared to other European Union nations, such as Greece. It also praised the central government for meeting its 2010 target for reducing its budget deficit and the implementation of economic and social measures, including recapitlizating the banking sector.

But, it said, “challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector.”

It noted “positive signs” from the export sector but said domestic demand continued to be weak, in part due to the high unemployment rate.

The National Statistics Institute in Madrid reported Friday that the jobless rate fell in the second quarter to 20.9 percent, down from 21.3 percent in the previous quarter, but still the highest in the European Union.

Prime Minister José Luis Rodríguez Zapatero has cut wages and froze state pensions to reduce the government debt, but Spain’s financing costs surged again when European leaders failed to immediately agree on a bailout for Greece earlier this month.

Finance Minister Elena Salgado, speaking on Spanish radio Onda Cero, called on her E.U. partners to implement the decisions made last week in Brussels “more quickly” to reassure markets, Bloomberg News reported.

“Spain is on the right path for fiscal consolidation,” she said, while also noting that “Moody’s won’t take action” for another three months.

Article source: http://www.nytimes.com/2011/07/30/business/global/european-sovereign-debt-crisis.html?partner=rss&emc=rss