Moody’s negative outlook for Britain sends the pound, bank stocks tumbling

February 26, 2012 at 3:48 pm

Moody’s credit rating agency has announced that British banks RBS, HSBC and Barclays are among 114 major banks in Europe that are currently under review for possible downgrades. The announcement came on the heels of a warning that the UK, along with France and Austria, is in danger of losing its triple A-rating after being placed on a negative credit outlook by the rating agency.

Moody’s said in a statement that although the UK operates outside the Eurozone, it is in danger of further economic, political or financial shocks due to trade and financial links within the zone. Furthermore, the UK’s outstanding debt has effectively matched it with the most indebted triple A-rated nations.

The statement stated that there is a 30% chance of a rating downgrade for the UK within the next 12 to 18 months, which is the lowest level of warning that could be issued by Moody’s. However, even this low-level warning is likely to have an effect on the lending policies of Britain’s financial institutions which are already under pressure from policy makers to keep more funds liquid in case of further shocks from the Eurozone. This will in turn hike up interest rates and hamper the growth and profitability of banks.

The stock and currency markets reacted shortly after Moody’s statement, with sterling falling to a two-week low against the dollar while stocks for most of the reviewed British banks plummeted before making a drawn-out recovery.

Financial Times London reports that during the recent developments in the Eurozone debt crisis saga, Moody’s has downgraded the ratings of six European nations including Italy, Spain and Portugal. Among the 114 major banks under review, over 20 have headquarters in Italy, over 20 in Spain, with 10 in France, 9 in Britain and seven in Germany.

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