Moody's starts a fire with downgrade threat

Moody's Investors Service sent shockwaves through the global banking system as the ratings agency threatened to slash the credit scores of more than 100 banks in the wake of Europe's debt crisis.

The agency has put the ratings of 114 banks in Europe under review, as well as 17 investment banks. The move could hit 122 banks in total as nine of the investment banks are based in Europe.

All four of the UK's big banks - HSBC, Barclays, the state-backed Royal Bank of Scotland and Lloyds - face potential downgrades, affecting their ability to fund themselves in financial markets and potentially hampering an already weak recovery.

Michael Symonds, a bank analyst at Daiwa Capital Markets Europe, said: "The banks are getting it from all sides at the moment - the ratings are only going in one direction.

"All things being equal, a lower rating will make it more expensive for them to fund themselves and make funding sources scarcer, as some bond funds can only hold bonds of a certain rating."

One senior banker said: "This is yet another example of the ratings agencies pandering to the populist mood rather than giving markets and investors anything which is informed, useful or timely."

Moody's assault on the banks came two days after it slashed sovereign ratings on European nations, including putting Britain's AAA credit rating on negative outlook.

The agency blamed "disrupted markets and a deteriorating, uncertain economic outlook" for its bank review. Moody's added that investment banks in particular were facing headwinds such as "more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions", which would diminish long-term profits and growth.

Morgan Stanley of the US and two Swiss banks, UBS and Credit Suisse, could be knocked three notches lower on Moody's creditworthiness scale. Goldman Sachs could be downgraded by two notches.

Moody's managing director of European banks, Johannes Wassenberg, denied that the agency was part of the problem, saying it was providing "transparency" to the market.

- Independent