Moody's is reportedly set to downgrade 21 Spanish banks according to a Spanish economic daily, thereby casting another blow to the banking industry in Europe.
The move wouldn’t come as a surprise -Moody’s has been poised for the rating cut since February, when the agency announced it was planning to downgrade 122 financial institutions by May. The ratings of 114 banks from 16 European countries were put under consideration, with the downgrade risks mainly relating to the eurozone periphery.The rumors of a possible Spanish downgrade come days after the agency cut the ratings of Italian banks. On May 14, Moody’s dropped the debt rating of 26 financial institutions, including the giant UniCredit, as Rome struggles with recession, tough austerity measures and 1.9 trln euro of outstanding public debt.The banking sector across Europe is very much under pressure this year. In April, the IMF issued a report saying that the total assets of 58 largest EU banks are likely to be decreased by 7% (2.6 trln dollars) by the end of 2013. The decrease in assets is down to meeting the new regulatory framework of Basel III, as well as by the activity decline in the M&A and IPO sector, the latter being the main source of profit for investment banks and divisions. According to Ernst &Young, the number of IPOs decreased by 47% year-on-year in Q1 2012, while M&A fees hit a three-year low at $15.9 bln.By May, the ECB conducted two long-term refinancing operations (LTRO) totaling 1 trln euro to stimulate banks and economic growth. Though Moody’s insists that the support from the European Central Bank lowered the default risk for many of the banks, analysts and market players are waiting for the LTRO III.