Investors get Moody with Spanish banks

The eurozone sovereign debt crisis continues to rumble on this week with the news that ratings agency Moody’s has downgraded a number of Spanish banks.

In downgrading the credit ratings of these 16 Spanish banks, Moody’s has also downgraded Santander UK. We blogged earlier this week about Kent County Council pulling their overnight deposits out of Santander UK.

The downgrades have been applied for a number of reasons, including a number of bad loans made by these banks to the property sector.

They have been made against a backdrop of Spain slipping back into recession and the threat of contagion as the fate of Greece as a member of the single currency hangs in the balance.

Investors were naturally spooked by the move.

Whilst the Spanish stockmarket opened down around 2%, it has since recovered. As I type this, the FTSE 100 is down another 1.4% at 5,262.

It appears that investors are seeking a safe-haven for their cash. The yield on 10-year German bonds fell to a record low of 1.399% this morning. The price of gold is up by 2.7% this morning, at $1,588/oz, shrugging off a recent correlation with risk assets.

Whilst what is currently happening in Europe shares many similarities with the start of the global financial crisis in 2008, the global banking sector at least appears to be a more robust position this time.

Other indicators, including the cost of banks lending each other money, do not suggest a crisis or any need to panic about access to savings. In any case, savers with deposits in UK authorised and regulated banks (including Santander UK) are protected by the Financial Services Compensation Scheme (FSCS) up to a level of £85,000 per person, per institution.

Commenting on the downgrade of Spanish banks by Moody’s, Tristan Cooper, who is Sovereign Debt Analyst at Fidelity Worldwide Investment, said this morning that it has been coming for some time but does represent unfortunate timing for Spain.

He also said, “With rumours of bank deposit withdrawals, Spain can ill-afford another blow to confidence. Once a bank run begins it is very hard to stop without a credible deposit guarantee. Given the fragile fiscal position of Spain, the ECB is under increasing pressure to step in to calm depositors’ nerves.”

Photo credit: Flickr/Laura Padgett