GROWING UNCERTAINTY over State banking policy and a greater chance that burden-sharing will be forced on bondholders have led Moody’s to downgrade the senior unsecured debt of the six domestic banks.
The rating agency said the move had stemmed from “statements from both the leading Opposition party and the incumbent finance minister”.
The existing “supportive” policy in relation to Irish banks has been called into question, Moody’s said. “While some of these statements may reflect the current pre-election debate, Moody’s is increasingly concerned that they may represent a growing underlying threat for senior creditors.”
Moody’s has also placed the deposit ratings of the banks – Bank of Ireland, AIB, EBS, Irish Life & Permanent, Anglo Irish Bank and Irish Nationwide – under review for a possible downgrade and has warned of downgrades to bank bonds backed by residential mortgages.
The agency identifies two threats to the unguaranteed senior debt of the Irish banks. First, it points to a greater uncertainty that the Government will be unwilling to build on the “support” it has so far extended to the banking sector. Last Wednesday’s decision to withhold further capital injections into the banks until after the election “adds to these concerns”, according to Moody’s.
Second, the agency is worried about “an increasing risk” that the burden being borne by taxpayers will be shared not only by subordinated bondholders but by senior bondholders. This would most likely be done through a “distressed exchange”, Moody’s said. This would imply a haircut for the creditors.
“Should the risk for senior creditors increase significantly, the banks’ unguaranteed senior unsecured debt ratings would likely face further multinotch downgrades,” according to the analysis.
Moody’s cut the unguaranteed senior unsecured debt ratings of Bank of Ireland to Ba1/Not-Prime from Baa2/P-2. AIB was cut to Ba2 from Baa3, while EBS and Irish Life Permanent debt ratings fell to Ba2/Not-Prime from Baa3/P-3. Anglo Irish Bank and Irish Nationwide Building Society have been cut to Caa1 from Ba3.
The agency notes that Anglo Irish and Irish Nationwide, which last week began the process of selling off their deposit books, have “much lower systemic importance” than the other banks.
Moody’s also cut its ratings on the senior debt of KBC Ireland, which is owned by Belgium’s KBC, again citing “reducing support” for the Irish banking system. The new Baa3 rating (down from Baa2) continues to incorporate a high level of support from KBC’s parent, Moody’s said.
Its analysts will conclude their review of Irish residential mortgage-backed securities within the next fortnight.
