Credit Rating Downgrade

A Warning Shot from Canada

  • Why it matters

    Why it matters

    The latest credit ratings drop for Italy will only make it harder for the southern European nation to climb out of the financial situation it’s in. Handelsblatt’s Yasmin Osman points out the dangers of the vicious cycle between banks and nations, and the abilities of either to harm both.

  • Facts

    Facts

    • Now all of the major ratings agencies have downgraded Italy from A to BBB.
    • The downgrade will make it more expensive for Italy to borrow from the European Central Bank.
    • Canada’s DBRS is the fourth largest ratings agency in the world, with about a 2.5 percent global market share.
  • Audio

    Audio

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italy Readies $21 Billion Bank Bailout As Monte dei Paschi di Siena SpA Plan Fails
The poorer credit rating will make it more expensive for Italian banks to borrow money from the European Central Bank. Source: Bloomberg [M]

Canadian rating agency DBRS usually leads a shadowy existence in public perception. Unlike its big U.S. rivals Moody’s or Standard & Poor’s, only specialists are aware of its existence.

But for Europe these credit assessors from Toronto will determine whether the euro zone’s debt crisis has flared up again or not. This circumstance is shining a bad light on the state of the European Union and the previous attempts to curb the sovereign debt crisis that began in 2010 with the Greek crisis.

After stock markets closed on Friday, the Canadian rating agency lowered Italy’s credit rating from “A” to “BBB” – the last of the major rating agencies to do so.

DBRS puts the focus on the precarious state of the Italian financial system

The downgrade of Italy’s creditworthiness is a severe blow to Rome and the country’s banking sector, both psychologically and economically.

Economically, the poorer credit rating will make it more expensive for Italian banks to borrow money from the European Central Bank. That’s because Italy’s banks often provide government bonds as collateral for ECB loans. Because of the poorer rating, they will now have to submit more bonds because the ECB is now demanding higher risk markups. Italy itself will also have to raise more money for new debts.

However, the psychological consequences of the rating downgrade by DBRS are much more unpleasant. DBRS puts the focus on the precarious state of the Italian financial system. The lower rating is due in no small part to the ongoing weakness of the Italian banking system and the mountain of bad loans on the balance sheets of Italian banks. While this is not new, such a signal is unlikely to make the capital increase of Italian bank UniCredit an easier task.

The handling of the Italian crisis-hit bank Monte dei Paschi also shows how precarious other governments are currently assessing the situation with Italy and its banks. Brussels and Berlin have long since set the course for the bank to be saved with special rules, which are actually only meant to be used if the stability of the financial system is considered to be at risk. Many of those in charge see this assumption as a given and are more afraid of possible contagion effects than renewed state aid for deadbeat banks.

In other words, banks can bring entire countries to their knees with their problems, and a country’s problems can damage its domestic banking system. Europe actually wanted to break this vicious circle with common laws and new authorities. The European Union has not gotten very far with that so far. This is sobering.

 

 

To contact the author: osman@handelsblatt.com.

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