EU woes deepen with banks' credit rating downgrades

As the euro tragedy continues to unfold, the European Commission reveals plans to stop taxpayers footing the bill for collapsing banks.

by Michael Northcott
Last Updated: 19 Aug 2013

The British parliament may be in recess, but David Cameron and George Osborne will not be putting their feet up, as the situation in the eurozone continues to worsen. Spain finally admitted that debt markets are ‘shut’ to the government; there were bank downgrades in Germany and Austria; and in the UK it was revealed that Britain’s banks are sitting on £40bn of undeclared losses. The worst offender, according to shareholder advisory group PIRC, was RBS with around £18bn of undeclared losses that could eventually force the bank to ask the taxpayer for another bailout. 

But Spain faces the most severe financial predicament at the moment. Its government has admitted that the country can no longer raise funds from global markets or roll over its own sovereign bonds. Treasury minister Cristobal Montoro said the market is ‘no longer open’ and that Spain will now have to rely on European institutions such as the IMF for loan packages to rescue its banks. And, just in case European investors were not scared enough already, Montoro added that Spain’s economy is too big for EU bail-out mechanisms: ‘Technically, we can’t really be rescued,’ he said. Terrifying stuff.

So with a lot of Spain’s debt held in banks elsewhere in Europe, markets are responding accordingly. Six of Germany’s banks and three of Austria’s had their credit rating downgraded. One of the victims of the downgrade by Moody’s credit rating agency was Germany’s Commerzbank, which despite having held an A2 rating long term, has been cut to A3 and given a ‘negative outlook’ because of fears that the debt crisis could deepen in the coming months.

In response to all of this, the European Commission will reveal plans today that would stop the taxpayer having to bail out banks in the future. The main gist of the plans is that shareholders and creditors will have to bear losses instead of the government intervening at the taxpayer’s expense. Such a scheme aims to prevent a run on a bank, for example in Spain, from pulling down the entire European financial system. With the Spanish government’s current inability to borrow, such a collapse could happen easily. But there’s no way of protecting the taxpayer like this for the next couple of years: new legislation for the measures would not come in until around 2014.

As far as investors both in Britain and on the continent are concerned, financial data is not encouraging. The eurozone’s Purchasing Managers’ Index (PMI), which measures financial activity by the rate of buying of goods and services by purchasing managers, was down to 46 in May, from 46.7 in April. This is the steepest rate of decline in output in the eurozone since June 2009, according to Markit. The data indicated that even Germany was falling back into a contraction of this measure. 

With such doom and gloom hanging over Europe, perhaps it is a good thing we had Jubilee celebrations over the weekend. The rain, wind and (eurozone) fire were never going to stop cash-strapped Britain having a party now, were they?

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