Monday, October 5, 2009

Moody's luck of the Irish

Moody's is playing catchup with European bank downgrades, particularly with regard to the Irish banking institution. The chart below shows the number of notches they have downgraded banks in various European nations.

LTDR means long-term debt rating and BFSR (overview link at the end) stands for bank financial strength ratings. As with other types of ratings the agency has been behind the curve on European banks. Moody's fully bought the propaganda coming out of European governments and banks that they had little US sub-prime exposure and therefore were in great shape. If the real estate exposure is not sub-prime, it's got to be fine.

Here is a Reuters story from April 2008:
Irish banks have only limited exposure to subprime and the other related risky assets that have sparked huge writedowns at major international finance houses, Ireland's central bank said on Friday.

In its latest quarterly report, the central bank said that stress-testing showed Irish banks, which have a weighting of over 40 percent of Ireland's stock market, were well-capitalised and profitable.

Of course what Moody's didn't see (because by then they were totally fixated on their little US sub-prime problem) was how leveraged Irish banks were in their exposure to Irish real estate, including development and property loans. A few months after the Reuters story above, the Irish government was cooking up a bailout. They created a "bad bank" fund (sounds familiar ?) called National Asset Management Agency or NAMA (TARP, Irish style) to purchase massive amounts of bad loans from Irish banks using government funds.

Irish Sunday Business Post: The night of September 29, 2008, saw the state decide to guarantee the loans and deposits of the Irish banks, amid fears that the entire sector was about to collapse.

The state’s involvement in the Irish banking system - massive transfers of capital, nationalisation and now the National Asset Management Agency (Nama) scheme to rescue the sector from the consequences of its own disastrous lending policies - all stem from the fateful decisions made that night.

Anglo Irish Bank got hit particularly hard.
Finfacts: Anglo, along with other major lenders, has already taken some provisions to cover the cost of its deteriorating loan book -- the interim figures published on May 29 last showed loan "impairment" charge of €4.1bn.

However, the losses in the next report look set to be substantially greater. Apart from being NAMA's biggest single client, Anglo is also the bank with the most exposure to the troubled commercial and development property sector.

The fact that Irish banks came close to the brink and were saved by the government because of the types of exposures they had was slow to show up on Moody's radar screens. Until it happened. Of course the downgrades followed rapidly. A similar story took place in Spain and some other countries.

Moody's continues to get paid for financial strength ratings of banks.

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