Moody’s Investors Service has announced that it downgraded the senior debt rating of Anglo Irish Bank by three notches to Baa3/Prime-3 from A3/Prime-1. The debt is being kept on review for further possible downgrade. In addition, Moody’s downgraded the dated subordinated debt held by Anglo Irish Bank by six notches to Caa1 from Ba1—that debt is also on negative watch.
The Irish government plans to split the bank into a deposits-only Funding Bank and an Asset Recovery Bank. Moody’s believes that the novation of the deposits into the Funding Bank could increase the government’s options to share the burden of support for the bank’s liabilities with other creditors that remain in the Asset Recovery Bank. Thus, creditors holding senior unsecured notes face greater risk, absent an explicit government guarantee.
As far as the subordinated debt is concerned, things look really dicey. Moody’s notes that, in Ireland, as in most countries, the authorities have so far not imposed losses on dated subordinated debt outside of a liquidation scenario. However, the proposed greater burden-sharing between the government and creditors puts such securities at a greater risk of impairment. Moody’s outlines two factors supporting its judgment: (1) the continuing need for further capital injections as the non-NAMA loan book deteriorates; and (2) as the Asset Recovery Bank will be wound down, the capitalization of the entity is likely to be relatively thin, increasing the likelihood that the dated subordinated debt may be required to absorb losses. Moreover, since the subordinated debt does not mature until 2017, after the senior debt matures, it is at greater risk of impairment than the senior debt, requiring a more negative rating.
Meanwhile, fighting rumors that it will need an emergency loan from the European Union, the Irish government announced that it will disclose the final expenses of bailing out Anglo Irish Bank. The latest estimates are to be reported no later than Oct. 1, 2010. Bloomberg reports that the government has pledged 22 billion euros ($29.6 billion) to recapitalize the bank, while Standard and Poors says the final tally may be 35 billion euros, or 20 percent of Ireland’s gross domestic product.
For now, uncertainty remains as to whether Anglo Irish is still a viable bank, and whether the Irish government will need to inject more capital to keep it going.
Gregg D. Killoren
victoria1014
U.S. Perceived as Area of Uncertainty for Investment
Peter Sands, CEO at Standard Chartered, said global bankers see “uncertainty” in the US because of the midterm congressional election, the Federal Reserve’s moves and issues lingering from the mortgage meltdown. Complex banking rules, faltering economic recoveries and diverging interests of developed governments all pose risks in the West, Sands said in a Wall Street Journal article.
Consider this, too: more than one year after the “official” end of the recession (the National Bureau of Economic Research announced recently that the recession ended in June 2009), the Fed is still in “emergency” mode. The federal funds rate is still near zero, the Fed has stopped reducing its balance sheet, instead purchasing Treasury securities as the mortgage-backed securities it owns are paid, and the Fed is discussing plans to add more liquidity if the economy continues to falter.
The buying seen recently in U.S. equities is more likely speculation that the Fed will do anything to keep asset prices inflated than confidence in the economic recovery. While the U.S. is not likely headed for another recession, its economic growth is so anemic that there is not much upside to look forward to. Since equity prices are based largely on future earnings, it is hard to make the case, for prudent investors, to allocate assets heavily towards U.S. equities. Speculators may be correct that the Fed will print money endlessly to pump up asset prices and buy time for the recovery, but that is more akin to gambling than investing. There is simply too much uncertainty in the U.S. to get aggressively bullish on equities.
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Posted in Federal Reserve Board, Investing, Market Commentary, Monetary Policy, Personal Finance, Stocks
Tagged Equities, Federal Reserve Board, Investing, Market Commentary, Monetary Policy, Personal Finance, Stocks