Cart (0)
business newsMoody's Begins to Close the Ratings Uplift Gap
By
Peter Atwater
Jul 28, 2010 9:35 am
Clearly, the long-term debt ratings of the world's largest banks are dependent on both the willingness and the ability of governments to support them.
PRINT
 |
|
For those unfamiliar with how Moody's evaluates banks, it offers two ratings: stand-alone and with government support. Needless to say, ratings "uplifts" from government support only apply to the largest "systemically significant" banks, and despite what you may think, the difference between stand-alone and government-supported ratings can be significant ---as many as five ratings-notch differences.
Since the early spring, Moody's has warned that if regulatory reform lessened the willingness of the US government to stand behind our largest banks, it would have to close the ratings uplift gap. By its actions last night, it would appear that Moody's has now begun that process.
So, to state the obvious, the willingness of governments to support their largest banks matters to those banks' long- and short-term debt ratings.
But judging by the actions of Moody's in Europe over the past several months, so too does the ability of governments to support their banks. With the recent ratings downgrades of Greece and Portugal, Moody's has closed the ratings uplift gaps for those countries' largest banks as well.
So, to summarize, the long-term debt ratings of the world's largest banks are dependent on both the willingness and the ability of governments to support them.
To date, most investors have viewed this as a source of strength for the banking system. (And in fact, I'd note that many investors took even more comfort following the European Stress Tests when the EU essentially took the whole concept of support one step further by suggesting that European sovereign default was now an outright impossibility.) The lifeguards have it covered -- until they don't. Or more accurately, can't.In early March, in an action that got little attention in America, the nation of Iceland held a public referendum on whether the nation should support its banks (admittedly to bailout foreign depositors) and by almost unanimous vote, the public said "no."
Earlier this year, I offered that I thought that the real derivatives crisis was in financial guarantees -- off-balance sheet, contingent obligations. (See, Guarantees Are the Real Derivatives Crisis.)
Right now the marketplace believes that Western governments' willingness and ability to step up to meet their contingent obligations remains very strong. The recent actions by Moody's (and S&P for that matter) suggest increased caution.
As we saw with Fannie Mae (FNM) and Freddie Mac (FRE), the willingness and ability of providers of financial guarantees only matters when it matters. The outcome is binary.
Time will tell whether it's the lady or the tiger. But as I offered on Monday in The EU's 'Don't Ask, Don't Tell' Approach to Sovereign Debt Defaults, that's the bet.
You either believe or you don't.
Buzz & Banter: 30 professional traders sharing their ideas in real-time. FREE 14 day trial.
Positions in SPY, SH, and JPM.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
