Analysts: Moody’s Bank Downgrade Will Hurt Recovery, Consumers

Friday, 22 Jun 2012 12:27 PM

By Jim Meyers

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The decision by Moody’s Investors Service on Thursday to downgrade the credit ratings of 15 global banks and securities firms will have a negative impact on borrowers as well as the banks themselves.

The downgrades of financial institutions such as Citigroup, Bank of America, J.P. Morgan, Barclays, and Goldman Sachs reflect Moody's concern over the ability of the banks to repay their debts during times of crisis.

The result: Credit could become costlier and/or harder to obtain.

Since the cost of doing business for these giant financial institutions will go up as a result of having their rating lowered, the banks could pass along their higher costs — such as the higher interest rates they will have to pay to borrow money.

Or the institutions will have lower profits, which will inhibit their ability to lend.

“The Moody’s downgrade is not a positive for anyone,” said Sung Won Sohn, a professor of finance at California State University, Channel Islands, and a former banker. “The lower ratings means their ability to lend will diminish.”

Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore., worries that the downgrade is yet another psychological hurdle for consumers.

But he told The Christian Science Monitor: “The downgrade itself is not a waterfall event nor will it trigger a sudden decline in economic activity.

“I think there is more psychological damage than real damage. A few marginal borrowers may be turned down for loans at best.”

Moody’s downgraded the long-term senior debt ratings of four banks by one notch, or credit level, while the ratings of 10 financial companies were downgraded by two notches, and one firm — Credit Suisse — had its rating lowered by three notches.

All the banks that were downgraded by Moody’s are deeply involved in the global capital markets. “These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital market operations, but they also present unique risks and challenges,” wrote Moody’s Global Banking Managing Director Greg Bauer.

Those risks and challenges have been illustrated by J.P. Morgan Chase, which said it lost at least $2 billion in a series of complex trades that soured.

Analysts were concerned that Moody’s would lower the credit rating of Morgan Stanley by three levels, but the rating agency dropped it only two notches instead in the belief “that Morgan Stanley would be deemed too big to fail and thus get the support of the U.S. government, if it were in danger of defaulting on its debt,” The Monitor observed.

Sohn pointed out that the only major bank that was not downgraded by Moody’s was Wells Fargo, which is mainly in the consumer banking business.

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