Market Woes: Five Greek Banks Downgraded

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6:06pm UK, Friday May 18, 2012

Rating agency Fitch has downgraded five Greek banks, as the FTSE 100 takes a hit over expanding eurozone uncertainty.

The banks, including the National Bank of Greece, have been dropped from ‘B-‘ to ‘CCC’ – matching the downgrade of state-guaranteed issues on May 17.

The uncertainty in Greece and expanding fears in the Spanish bank sector hammered world stock markets in Friday’s trading. A total of 16 Spanish banks were also downgraded.

In London, the FTSE 100 lost 1.3% or 70 points to close at 5267- meaning it had suffered five consecutive days of falls.

Part-nationalised banks Lloyds and RBS, were the biggest losers, dropping 6.15% and 5%, respectively.

It means the index closed at its lowest level since November last year – and has lost almost £80bn in the year to date – £18bn of that on May 18.

FTSE 100 1-Week Chart

Across Europe the losses were tempered, in part, by rumours of a looming ban on the short-selling of financial stocks in Madrid.

What we’re witnessing in Spain and Greece isn’t a bank run in the traditional sense – in other words what we saw with Northern Rock in 2007. It is an invisible outflow of cash from one country to another.

Ed Conway, economics editor

The German DAX closed 0.6% down, the CAC in Paris was 0.1% lower while there were falls of 0.3% and 0.4% for the Italian MIB and IBEX in Spain respectively.

In Asia, Japan’s Nikkei had earlier shed 3% of its value.

The NYSE composite was also down in early Friday trading.

Tackling the crisis of confidence on the euro is set to dominate the G8 talks in the US this weekend.

It was the downgrades for the Spanish banks by Moody’s last night that had the biggest resonance with investors as trading began.

The move – which included the eurozone’s largest, Banco Santander – was due to a weak economy and the government’s reduced ability to support struggling lenders, Moody’s said.

Santander reacted to the decision by saying it would have no impact on its UK division which had little exposure to the problems in Spain.

Its statement said:”The change to Moody’s credit rating of Santander UK plc has no impact on our businesses in the UK or our plans for future growth.

“Santander UK plc is an autonomous subsidiary of the Santander Group, with more than 90% of its total assets held in the UK and a Eurozone sovereign exposure of less than 1% of assets.”

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Sky’s City Editor Mark Kleinman also pointed out that customer deposits – like those of other UK lenders – are protected by the Financial Services Compensation Scheme.

All the 16 Spanish banks’ long-term debt ratings were downgraded by at least one notch, and some suffered three-notch cuts.

Bankia – which is Spain’s fourth largest lender and was recently part-nationalised – had bigger problems to contend with.

Its shares plunged 27% at one stage on Thursday after Spanish newspaper El Mundo reported 1bn euros (£800m) worth of deposits had been withdrawn in the last week.

The Spanish Government and the bank’s chairman both released statements denying a run had taken place, in an attempt to stop the siege on its share price.

That has had an effect – with Bankia’s value recovering much of that ground today.

Spain’s banks have been dogged by bad loans arising from the collapse of the country’s property bubble.

The Spanish government has hired Goldman Sachs to value Bankia and is due to make a separate announcement on naming independent auditors to examine bad loans and property holdings in the financial sector.

Bankia Offices In Madrid

Bankia has denied reports of a client run on the bank and insisted deposits are safe in its hands

The moves are aimed at determining how big a state bailout is needed.

The Spanish Central Bank has acknowledged that bad loans among the country’s lenders have hit an 18-year high – such is the scale of the crisis.

The pressure on them has intensified over contagion from Greece and the Spanish prime minister Mariano Rajoy has appealed for the eurozone to come together to solve the Greek problem and ease the siege on his own nation.

:: Watch today’s events in the eurozone as they unfolded

:: What would happen to the markets in the event of a euro break-up? Watch an analysis by economic risk expert Dr Laurence Wormald

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