Subordinated European Bank Debt Face Broad Downgrades, Moodys

Tyler Durden's picture

Perhaps this helps explain the significant underperformance of European and US bank credit today as tonight we get the full downgrade watch treatment for all European bank subordinated debt. Moody's will review 87 banks in 15 countries with the view that average downgrades will be two notches for sub debt. The initial premise for the actions is the removal of government guarantees as they believe systemic support for subordinated debt is more uncertain. The greatest number of ratings to be reviewed are in Spain, Italy, Austria and France. The EURUSD is down around 20 pips on the news and ES 4-5pts.

The market (seen here with the spread between Sub and senior financials) has been pricing in some kind of notable differentiation between senior and sub debt for a while and perhaps this helps explain the modest reaction in EURUSD for now. The systemic bias is worrisome though and we wonder how ISDA will react to any credit events that impair sub debt and leave senior unaffected.

It is very noteworthy that there is a natural capital structure arbitrage between Senior and sub debt for the same entity (or entities). Given the zero floor on recovery and the identical probability of default (i.e. if sub debt triggers an event then senior must), then this leaves senior with an implied maximum recovery rate. As an example, the currrent ITRX SubFin trades 574bps and Senior trades 334bps, this implies (given the same implied default risk and some simple math) that if Senior Debt recovers more than 42%, then Sub debt will recover ZERO. Also of note is both the sub and senior index levels trade notably rich (tight) to their intrinsics (underlying value) - having rallied notably since early Friday - we suspect this will revert rapidly.

Moody's Full Statement:

Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade
Review focuses on reassessment of government support assumptions
London, 29 November 2011 -- Moody's Investors Service has today placed on review for downgrade all subordinated, junior subordinated and Tier 3 debt ratings of banks in those European countries where the subordinated debt still incorporates some ratings uplift from Moody's assumptions of government support, with the potential complete removal of government support in these ratings. The review will affect 87 banks in 15 countries in Europe with average potential downgrades of subordinated debt by two notches and junior subordinated debt and Tier 3 debt by one notch. The greatest number of ratings to be reviewed are in Spain, Italy, Austria and France. For issuers whose ratings were already under review prior to today's rating action, the completion of the existing review will now incorporate these additional considerations for subordinated, Tier 3 and junior subordinated debt.


Today's rating announcements follow on from the removal of systemic support from subordinated debt in systems including Denmark, UK, Ireland, Germany and Moody's report "Moody's to re-assess government support in bank sub debt ratings globally" published February 2011.


The review has been caused by the rating agency's view that within Europe, systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody's ratings.


This concern is driven by (i) the more limited financial flexibility of many European sovereigns that will increasingly be required to make difficult decisions regarding fiscal consolidation policies; and (ii) the resolution frameworks being discussed by both national and supra-national authorities (for example by the European Commission, which is expected to announce its proposals shortly).


The frameworks have the common objective of reducing very significantly the support provided to creditors and leave subordinated debt holders particularly exposed to exclusion from any support received.


During the review period, Moody's will (i) review the outcome of the expected European Commission proposals on bank resolutions and the implications for burden-sharing with subordinated debtholders; and (ii) interact with regulators and authorities to see if there is any additional information that would lead Moody's to maintain an assumption of support in the subordinated debt ratings.




Moody's believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints. Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders. Moody's notes that there have been recent instances where losses have been imposed on subordinated debt holders without any significant contagion to other liability classes (e.g., in Ireland). Consequently, there would need to be very clear reasons for Moody's to consider retaining an assumption of support in subordinated debt ratings.


For some time, the policy debate and framework within Europe has been moving in favour of imposing losses on subordinated debt holders outside of an insolvency scenario. Proposals and legislative changes to permit this include statutory writedown mechanisms, or mechanisms which enable authorities to either transfer debt between institutions or split up a bank and impose losses on subordinated debtholders. Some countries have already changed their legal or regulatory frameworks to incorporate this policy objective (e.g. UK, Denmark, Germany). There have also been cases where an ostensibly supportive legal framework has been quickly changed to an unsupportive framework, following a weakening of the sovereign and banking system (e.g., in Ireland).


Moody's awaits the European Commission's proposed framework on resolution regimes -- originally anticipated this summer but now delayed -- which the rating agency believes is likely to result in an explicitly less supportive framework for subordinated debt across the EU. However, even if there is a further delay in the publication of the framework, Moody's considers the evidence that sovereigns can quickly change the existing legal framework as reason to continue with the review of systemic support in subordinated debt, given the other pressures on sovereigns in the current environment.


Many of the above concerns were already expressed in Moody's February 2011 publication "Supported Bank Debt Ratings at Risk of Downgrade Due to New Approaches to Bank Resolution". Since that publication, however, many euro-area sovereigns have become increasingly constrained in their financial flexibility and consequently in their ability to support their banking systems. In several cases, the sovereign has faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets.


While the need to preserve confidence may imply some continuing (though potentially declining) support for senior debt -- given the potential for contagion across the banking system -- the rationale for continuing to assume the willingness and ability to provide support for subordinated debt holders is much weaker. Moody's has seen clear precedents that losses can be imposed on subordinated debt holders without any significant contagion to other liability classes. Moody's view is that these pressures go beyond the euro area to encompass all EU members; Moody's will also review to what extent other closely integrated markets outside the EU, such as Norway or Switzerland, are affected by this change in its support assumptions.



The banking systems and number of banks affected by the review are in the following countries: Austria (9), Belgium (3), Cyprus (2), Finland (3), France (7), Italy (17), Luxembourg (3), Netherlands (6), Norway (5), Poland (1), Portugal (2), Slovenia (2), Spain (21), Sweden (4),Switzerland (2). A list of affected institutions is here:


A full analysis of the effect of the review is set out in the Special Comment published today "Reassessment of Government Support Assumptions in European Bank Subordinated Debt". For the latest details on Moody's global approach to incorporating systemic support in Moody's bank debt ratings please see, "Status Report on Systemic Support Incorporated in Moody's Bank Debt Ratings Globally." Both reports were published today and can be found on .

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Last_2_Sense's picture

Excerpt: “From their position of power, as the financiers of governments, the banking elite have over time perfected their methods of control. Staying always behind the scenes, they pull the strings controlling the media, the political parties, the intelligence agencies, the stock markets, and the offices of government. And perhaps their greatest lever of power is their control over currencies. By means of their central-bank scam, they engineer boom and bust cycles, and they print money from nothing and then loan it at interest to governments. The power of the elite banking gang (the ‘banksters’) is both absolute and subtle … Capitalism is a vehicle that helped bring the banksters to absolute power, but they have no more loyalty to that system than they have to place, or to anything or anyone. As mentioned earlier, they think on a global scale, with nations and populations as pawns. They define what money is and they issue it, just like the banker in a game of Monopoly. They can also make up a new game with a new kind of money. They have long outgrown any need to rely on any particular economic system in order to maintain their power. Capitalism was handy in an era of rapid growth. For an era of non-growth, a different game is being prepared.”

Moore describes it well ~ “Just as the financial collapse was carefully managed, so was the post-collapse scenario, with its suicidal bailout programs. National budgets were already stretched; they certainly did not have reserves available to salvage the insolvent banks. Thus the bailout commitments amounted to nothing more than the taking on of astronomical new debts by governments. In order to service the bailout commitments, the money would need to be borrowed from the same financial system that was being bailed out!”

Moore explains ~ “It’s not that the banks were too big to fail, rather the banksters were too powerful to fail: they made politicians an offer they couldn’t refuse. In the USA, Congress was told that without bailouts there would be martial law the next morning. In Ireland, the Ministers were told there would be financial chaos and rioting in the streets. In fact, as Iceland demonstrated, the sensible way to deal with the insolvent banks was with an orderly process of receivership…The effect of the coerced bailouts was to transfer insolvency from the banks to the national treasuries. Banking debts were transformed into sovereign debts and budget deficits. Now, quite predictably, it is the nations that are seeking bailouts, and those bailouts come with conditions attached. Instead of the banks going into receivership, the nations are going into receivership.”

Sunshine n Lollipops's picture

Those bankers are some crafty bastards, I'll give 'em that. I wonder how crafty the bloodthirsty mobs will be when they get their hands on 'em?

Whoa Dammit's picture

We need to get rid of all of the imaginary crap that the banksters conjured up out of thin air to create computer money and real bonuses (CDS, MBS, derivatives, ad nauseum). These financial inventions have about as much asset backed investment value as toe nail clippings.

Iceland proves that taking away the banksters fictitous toys results in the best outcome.

Sunset chaser's picture

I'm working on a new app for google translate to/from bankster language to help the common man better understand what's going on here.  Here's the first translation.

MSM report:  European banks are urging the ECB and other central banks to print money.


Google translate to bankster:  The souless entities we represent have nothing of value to offer in exchange for your national currency, so we expect you to give it to us for free.

Deadpool's picture

great way to support a stealth strong dollar policy. As long as this goes on US rates remain low. Japan here we come...

Vampyroteuthis infernalis's picture

Moody's, "Blah blah blah........."

mynhair's picture

Subordinated to whom?

Only GS matters.

mynhair's picture

Yada, yada, yada.  Europe is toast.

Old news.

Tell it to MDB, aka Wanger.

The Harry one.

Wixard's picture

It's silly how fast the market is burning through rumors. Without one its like trying to float rocks in the ocean. 


It was all solved yestarday though! We had a RALLY! Banks are fine. 

mynhair's picture

Banks are fine.  Ours, that is.

Wixard's picture

Even though american banks have some exposure to europe, and surely the fed would print print print. It doesnt matter because we aren't dealing in a sane market anymore. 


The dominos fall from fear. Start the chain reaction and even the perfectly fine banks feel the heat because they get beaten down with the rest. 


We're in a global econ. and it all sinks or swims together. Even a hint of euro breakup caused chaos for our banks. Imagine what the real thing does. Not just to ours, but chinese/russian/indian etc. 



Of course the fed would dump as many dollars as it takes to keep our banks running no matter what. But what will happen before then is they'll hit rock freakin bottem. 

mynhair's picture

Dammit, our banks are fine.  OWS will make sure of it, one way or the other.

RobotTrader's picture

So what is next?


More panicked investors will simply pile into U.S. Treasuries

And Tom Keene's voice will start getting squeakier

And Uncle Gorilla continues to get "free money"

And commodities will get dumped

And Ben will claim that "inflation expectations" are non-existent.

And more wild-eyed U.S. Consumers will pack the malls.

Did I miss anything?

mynhair's picture

Next is we get your address, and beat you to a bloody pulp, cuz no one knows where Bernankenstein lives.


Buy the long gorillas, I need an entry point for TMV.


Only Libs give TDs without response.  It's that 'emotional' thinghy.

Brain dead morons.  Like Zombies, but worse.  They can vote.

YesWeKahn's picture

" cuz no one knows where Bernankenstein lives."


NoClueSneaker's picture

K- Barrett can estimate ...

( grey pointed barrel plz )... :-P

JohnG's picture



But you can shoot them:

Head shot matter, the rest is just fun!



disabledvet's picture

And BofA will be deconstructed and state and local governments will panic and funding crises will spread like wildfire. Other than that "spot on"!

Wixard's picture

Everything is whole again, im getting into some of that greek treasury action. While im at it, lets all pile into jpy!


Best black friday ever, new home sales up, debt is down, the economy is roaring like the 20s! 


China is booming too! Look at all the infrastructure they've built, surely it'll fill up eventually! 


IMF gonna do the bailout boogie, we have low inflation and unemployment is dropping. 


Ben bernake is an economic GENIUS. The einstein of our times. 

LynRobison's picture

Yes, you missed something. After the collapse of the Euro, US treasuries and the dollar will be a safe haven for about three weeks, and then people will start to realize that they are all standing on an ice flow -- paper currency with nothing to back it. People will start piling out of the dollar and into gold and silver, and the economy as we know it will collapse. All paper currencies will become worthless, which will make it impossible for the sheeple to pay their debts. Then the World Bank and the IMF will introduce PM-backed SDRs as the new world currency. At that point, the cabal will control all of the world's assets, and they will control the only currency that can be used to pay the debts against those assets. They will be the Lords over a new world-wide feudal system.

IQ 101's picture

Only if you accept the new currency, just say no and fuck off on your new bicycles with friends and family,  to regions unknown, or sell out for convenience, as is the norm.

Death or Glory.

FlyPaper's picture

The US will be the only, still biggest, game in town.   China: will be flat on its ass with huge domestic problems as will everyone else.

There won't be an international currency - except to transaction in - and likely partly gold backed.  Why are the Russians and Chinese are buying gold hand over fist?

bugs_'s picture

who's the broad doing these downgrades?

fonzanoon's picture

and things will come to a panic stricken state where the markets begin to collapse and then they rally.


These rating agencies sure are busy doing nothing.  Sounds about the same as '08. 

fonzanoon's picture

My stupid brain thinks that Europe will finally come to a solution that at least sounds substantial enough to get them off the front pages, maybe even strengthens the euro. If that were to happen who would be up next, Japan or the US?

Wixard's picture

I think its chinas and japans turn. I dont think we get our turn till 2013 or late 2012

fonzanoon's picture

Could you imagine if the ten year blows out to 5% from 2% in a week. The total shit show that would break out all over the markets? Never would happen right? The rates would stay the same but the fed's balance sheet would just blow up and you would hear rumors about countries dumping treasuries?

Deadpool's picture

me thinks you'll see that play out soon enough.

mynhair's picture

Stupid covers it.  There is no solution to years of BS promises.

Just take care, personally, of your aged.  Set an example.

Don't need no stupid goobermint!

fonzanoon's picture

There is no solution to years of BS promises.....I guess thats the bottom line.

walküre's picture

I'm German FIRST, European SECOND.

There is NO solution.

If you consider a short term fix that will put a bandaid on the malaise for a few years before we're seeing another war between people of different national orgin.. then perhaps, one could call that solution.

Germans hate bailouts. They hated paying for the East when Germany reunited. The North hated supporting the South until recently and now the South (of Germany) hates bailing out the Northern parts of Germany.

To get Germans to accept that even one penny of their paycheque goes to support public services, health care, infrastructure or whatever in Greece, or Italy or Spain WHEN AT THE SAME TIME their own people are getting laid off or have too little to retire, THEN those Germans will take it to the streets and they will revolt.

Been there, done that. It won't happen. Merkel knows it and despite the cultural differences, I believe Sarkozy is finally getting it.

Germans are incredibly stubborn.

Deadpool's picture

dust off the Panzers, Valkarie. Let's roll.

fonzanoon's picture

"If you consider a short term fix that will put a bandaid on the malaise for a few years before we're seeing another war between people of different national orgin.. then perhaps, one could call that solution."

That is exactly what I am saying. If that were to happen who would be the next domino? Thats all I was asking

Boilermaker's picture

They'll jack the shit out of the ES at roundabout 3 am. 

XLF down a full 1/3 of a percent AH.

JohnG's picture



I must agree....the smoke is being lit as I write.  Just turn on the fans.

Total complete farce.  It's getting comical at this point.

mynhair's picture

I'm feeling stressed.  Don't mess with me.

My name is BAC.

ucsbcanuck's picture

Don't worry BAC, soon the naked shorting won't be allowed. The market will then sing you a gentle lullaby.

disabledvet's picture

without a doubt JP Morgan has had its eye on Europe for some time as its main growth market for both future lending and profits given both the very high savings rates for Europeans in general and the fact that European retail banking operations are pretty weak relative to the USA. Such a totally preventable meltdown of the entirety of the EU does more than just put a damper on that plan. Moreover given that Goldman Sachs is Germany's second largest bank and i think we have all the makings of a "coup de grace" of a significant chunk of Wall Street itself with dangerous consequences for continued financing of municipal debt at exceedingly low interest rates. Since the Fed has hammered interest rates to near zero offering savings itself in the USA little to no reward and given the stealth inflation we've had for some time and obviously any blow up in equities can lead to some pretty hairy financial conditions throughout various state and local governments. since the USA has obscenely militant public sector labor unions but no private unions to speak of anymore the conditions are darn near perfect for a mass credit event of Europe immediately impacting significant chunks of the good 'ol USA. throw in a bombing campaign with Pakistan and, just makes me think of song as usual:

mynhair's picture

Nice punctuation, ie, your prose suks.  Try some paragraphs.  Just constructive criticism, I hope.

kito's picture

dont pick on disabled vets, and learn to spell........

disabledvet's picture

paw prints on my keyboard. and in my puppy prose too.

GOSPLAN HERO's picture

It's i.e., not ie.

Do you still fart around on MarketWatch?


Wixard's picture

Market watch, home of the pump n dumps.

JohnG's picture

LOL!  Marketwatch (seen him there) Yahoo Finance for dummies...

Boilermaker's picture

Mini-plunge hits the magic air brakes.  Resume the non-stop mechanical grind up.

navy62802's picture

It's only a matter of time. The inevitable can be delayed, but it cannot be avoided. Stocks have not bottomed, and the crisis is not over.