Lagarde warns of 'acute stress' as Moody's hits banks
by Daniel Mason
Fifteen international banks and financial institutions had their credit ratings downgraded by Moody's last night following a four-month review by the agency that revealed the continued weakness of the global financial sector. It came as Spain announced that its fragile banking system would need additional funding of up to €62bn.
And with the economic crisis showing no signs of abating, International Monetary Fund managing director Christine Lagarde urged the eurozone to make a "determined and forceful move towards complete European monetary union" to restore confidence in the single currency – advocating a number of policies that Germany in particular has so far rejected.
Among the European banks to have their ratings cut by Moody's were the Royal Bank of Scotland, Barclays, HSBC, Credit Suisse, BNP Paribas, Credit Agricole, Societe Generale, UBS and Deutsche Bank. All the banks involved had "significant exposure to the volatility and risk of outsized losses inherent to capital markets activities", said Greg Bauer, global banking managing director at Moody's.
The other institutions affected were Citigroup, Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley and the Royal Bank of Canada. Four banks were cut by one notch, 10 by two notches, and one – Credit Suisse – by three notches. In a statement, Moody's said it had also assigned some of the banks a negative outlook, because government support for them was "likely to become less certain and predictable over time".
The downgrades came on the day independent audits of Spain's banks concluded that they would need between €51bn and €62bn to stabilise the country's financial sector. Eurozone finance ministers had previously pledged to provide up to €100bn for the recapitalisation of Spain's banks using the region's bail-out funds.
The Spanish government is expected to officially request the aid next week, having already signalled its intention to do so earlier this month. Prime Minister Mariano Rajoy's administration had been waiting for the independent audit before making its move. Yesterday Spain was forced to pay euro-era record amounts to borrow on the open markets, indicating growing concerns about the country's finances.
Meanwhile, new Greek Prime Minister Antonis Samaras has named the chairman of the National Bank of Greece, Vassilis Rapanos, as his finance minister. Samaras appointed a cabinet led by members of his centre-right New Democracy party yesterday, having won elections on June 17. He said the cabinet would take an immediate 30 per cent pay cut. The government, a coalition with the socialist Pasok and Democratic Left parties, has pledged to renegotiate the terms of Greece's European Union and IMF bail-outs, which total €240bn, including by asking for more time to implement public spending cuts.
A statement issued by the three political parties said: "This government's task is to tackle the crisis, open a path to growth and review terms of the loan agreement, without endangering the country's European course or its place in the euro. The goal is to create the conditions that will lead the country out of the crisis, and from the need to depend on loan accords in the future."
Following a meeting of eurozone finance ministers in Luxembourg last night, Eurogroup President Jean-Claude Juncker said that he expected officials from the troika of the European Commission, European Central Bank and IMF to be invited to Athens on Monday to assess the situation before discussions about an "updated" memorandum of understanding – the terms of the bail-out – take place.
He said the situation was "urgent" and that "all the procedures need to be speeded up", adding that by the end of the month Greece would receive the final €1bn of the first installment of its second bail-out – cash that was previously withheld as the country held two elections in six weeks before finally forming a viable government. Some of that money will be used by Greece to pay its contribution to the European Stability Mechanism, the eurozone's new permanent bail-out fund that is due to become operational next month, Juncker said.
Speaking alongside Juncker, IMF chief Lagarde echoed the calls by G20 leaders in Mexico this week for the eurozone to move ahead with a more deeply integrated monetary union."We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," she said. "And with that in mind, the IMF believes that a determined and forceful move towards a complete European monetary union should be reaffirmed in order to restore faith in the system."
Lagarde made the comments as the IMF published a series of recommendations following a three-week assessment of the eurozone economy. The so-called Article IV consultation set out long-term and short-term goals that the eurozone should work towards – including more emergency central bank action, "concrete" moves to a banking union for the euro area, the introduction of a "limited form" of common debt issuance, a greater emphasis on structural reforms, and direct support for weak banks via the eurozone bail-out funds.
Many of the ideas have been blocked up to now by German Chancellor Angela Merkel, but Lagarde said she hoped that "wisdom will prevail and that the best solution can be at least looked at, rated against its drawbacks and found net positive". The leaders of Germany, France, Spain and Italy will meet in Rome today for discussions ahead of next week's EU summit in Brussels. At the Brussels gathering on June 28-29, European Council President Herman Van Rompuy is due to present a report outlining the building blocks of a long-term plan to deepen eurozone integration.
Italian Prime Minister Mario Monti warned in an interview with The Guardian that should the summit fail to build confidence then "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries". He said: "A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."