Most Euro Bank Bailouts No Threat to Sovereign Debt Ratings
Despite the unprecedented size and scope of recent bank bailouts, Standard & Poor’s does not expect them to impact European sovereign debt ratings, with the exception of Iceland.
In a new FAQ on the topic S&P says “We understand that the consequence of these developments for the fiscal performance of Western European sovereigns, with the exception of Iceland has been limited so far, even where the budgetary costs have been incurred. These sovereigns generally remain well placed in their respective rating categories and have the capacity to take on more debt or run down their assets should the need arise in the current worsening financial climate.
“Indeed, in our opinion the underlying strengths in the credit profiles of Western European sovereigns–including high per capita incomes, political stability, and diversified and flexible economies–continue to outweigh the negative financial sector developments.”
The fallout from the banking crisis would need to become substantially larger, or be accompanied by acutely debilitating side effects to real economic development, to negatively affect our assessment of a sovereign’s creditworthiness.
“Consequently, the concerted intervention by Belgium, Luxembourg, and the Netherlands to lend financial support to Fortis Bank has no impact on their respective sovereign ratings and neither does the capital injection in Dexia Bank by Belgium, France and Luxembourg. Similarly, the nationalization of Northern Rock PLC, and more recently the loan book of Bradford & Bingley, do not affect the sovereign credit ratings on the U.K. As the mortgage books of the nationalized institutions are run down over time, those payments will contribute to pay down the incremental debt assumed by the public sector. Similarly, there has been no impact on the sovereign credit rating on the Republic of Ireland as no budgetary cost has been incurred. However, given that it has guaranteed an estimated €400 billion worth of deposits and debt, if any of the Irish banks fail, the largest of which has funding from these sources equal to around 90% of GDP, the sovereign could end up facing a substantial payout and a significant increase to its debt.”
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