PUBLISHED: 19:12 EST, 21 June 2012 | UPDATED: 19:12 EST, 21 June 2012
Moody’s cut the ratings of global lenders including Bank of America, JP Morgan and Goldman Sachs on the grounds that their growth prospects were sinking.
The downgrade came after several pieces of bad news caused the Dow Jones Industrial Average to fall by two per cent.
The economic outlook became so bad by the end of the day that Goldman Sachs advised its clients to start betting against the stock market.
Announcing the downgrade, Moody’s said it was especially concerned about banks with significant financial markets businesses because those markets have become so volatile.
These banks were vulnerable to ‘outsized losses,’ Moody’s global banking managing director Greg Bauer said in a statement.
The giant companies are all major players in the global stock and bond markets, which have become extremely unpredictable.
The downgrades come at a time of great uncertainty in the global economy. Europe’s currency union is under threat, the U.S. economy is slowing and the red-hot economies of India, Brazil and China are cooling.
On Thursday the Dow plunged 251 points, its second-worst loss of the year, as new reports indicating slower manufacturing in the U.S. and China made investors fearful that the global economy could be heading for another slump.
The only good news was apparently at the pump. The price of oil fell Thursday to its lowest level in almost nine months – $78.20 a barrel. Gasoline was way down, too, at $3.47 a gallon, 46 cents below its peak in early April.
In Britain, homeowners and businesses faced the threat of higher borrowing costs last night after the country’s biggest banks suffered humiliating downgrades to their credit ratings.
Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group saw their debt scores slashed amid growing fears of a meltdown in the eurozone.
The move means these banks could be forced to pay billions of pounds extra to raise funds – which, in turn, could push up rates on loans and mortgages for households and small businesses across the country.
Several lenders including Halifax, part of state-backed Lloyds, have already ratcheted up their mortgage rates as their own funding costs have increased, piling misery on cash-strapped families.
According to Gary Greenwood, a banking analyst at Shore Capital, a stockbroking firm, the downgrades could have a further impact on households and companies.
He said: ‘Banks will do what they always do which is pass on any increase in their costs to customers in the form of expensive loans and mortgages.’
Last week Bank of England Governor Sir Mervyn King effectively wrote banks a blank cheque, promising to provide them with ‘whatever liquidity they require given the prospect of turbulence ahead’.
In conjunction with the Treasury, the Bank unveiled two new stimulus packages worth £140billion a year to keep the banks afloat and encourage them to increase lending to cash-starved households and small businesses.
On Wednesday, it held its first monthly auction of £5billion in cheap loans, under the new £60billion a year ‘Extended Collateral Term Repo’ scheme.
Details of a separate £80billion-a-year ‘funding for lending’ package designed to boost lending to the economy will be announced in the coming weeks. But there are fears that customers could still end up paying more.
RBS, which is 82 per cent owned by taxpayers, admitted it would have to raise its cash cushion by £9billion as a result of the downgrade.
Credit ratings are used by markets as a key barometer of financial health and reflect confidence in the ability of a firm – or a customer or country – to repay money.
The lower the credit rating of a bank the more they have to pay to borrow money on the wholesale markets that they need to lend to households and businesses.
In February, Moody’s warned that it was looking at 100 firms in Europe and a handful in the US amid the escalating debt crisis in the eurozone. The agency has already downgraded major banks in several European countries, including Spain and Italy, with Spanish-owned Santander UK affected last month.
Santander, which has 25million customers in the UK, said it experienced a ‘heightened state of activity’ in branches from customers but claimed things are back to normal.
RBS last night said it ‘disagreed’ with the decision by Moody’s and said it was ‘backward looking and does not give adequate credit for the substantial improvements’ to the group’s finances.
Lloyds said: ‘We believe this change will have limited impact on our funding costs and market capacity.’
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