Banks Downgraded to Junk

This seems like bad news and hardly the kind of response the government would have been hoping for after its stress test report and recapitalisation commitments. What I don’t know is whether this makes much difference at this point in relation to corporate deposits. Is it the case that the large deposits that were going to be pulled are already gone or is this downgrade going to trigger further withdrawals?

44 replies on “Banks Downgraded to Junk”

It is bad news. As iI understand it the rating downgrade refers to deposit ratings (amongst other) and must be of concern for any corporate treasurer. It effectively precludes them from depositing funds in any of the Irish banks.

@ CP/Karl

if you (a corporate) still have your money in an irish bank, its on foot of the deposit guarantee. As long as thats in place i don’t think this action in and of itself will make a difference. The sovereign rating is the key dynamic on that score.

@Eoin Bond
I don’t agree. With the Sovereign one notch above junk and the deposit rating junk, you would want to be a very brave (or foolish) corporate to take that risk. A someone wrote we are on false step from the sovereign being rated junk and remember the Sov. Rating is Negative.

I agree with Ceteris paribus, without knowing much about it! The mood seems to have switched from “what’s the best rating” to “what’s the worst”. It doesn’t matter if Fitch and S&P both rate us above junk and stable if Moodys rate us as junk (except to the ECB, of course 🙂 ).

Junk deposit ratings will accelerate (or at least maintain) the deposit flight.

“As a result, Moody’s is no longer incorporating any systemic support in the unguaranteed  senior unsecured debt ratings of the domestic Irish banks and these are now placed at the same level as the stand-alone ratings of the banks,” it said.

Moody’s arse covering for treasurers wrt Irish banks has retreated to the point where it is questionable what value leg has had to the taxpayer. The cost of it is rather less questionable.

Would you go along with the “no appetite” thing from ph and Lozza BS and run the risk of having to explain you ignored Moody’s because the Irish are so insecure they think they are only defined by a network of contracts?

You could argue they are getting ahead of events and reaching the wrong answer wrt deposits but they are alerting investors to a financial risk. Last time deposits were put on negative outlook after the”not another cent”fg outburst bns exited.

What does all this imply for the ‘small saver’? I note that the EBS is now offering 6.25% on 18-month deposits. What does this say about the risk of not getting your money back?

Do we have sense if the ratings agencies are reflecting market sentiment, are anticipating it, or are lagging it? Or do they still exist in a parallel universe – exemplified by their previous AAA ratings for the bundled crud emanating the US sub-prime market? Irrespective of the answers to these questions, it seems that the general view is that the banks will continue to rely on the sovereign for equity support and on the ECB for liquidity support.

With the sovereign and the banks out of the market for the foreseeable future, does it really matter? The only concern I have is that everyone else in Ireland is being shut out of the international capital markets – irrespective of the solidity of the economic and financial case they might be able to present to secure such funding.

Ireland is bankrupt. It was bankrupt before the new Government came in and before they threw away another €24 billion into the black hole banks. Half a million are unemployed, a million more have had their wages cut, and there is still an €18 billion current account deficit. No amount of book cooking and PR can spin this as anything other than it is—Ireland cannot pay its debts, bank or state.

Ireland must default. Ireland will default. Our banks, now rated lower than banana republics, should just be let go. Let them go! When every bond trader in the world is telling you your bank is untouchable, it’s time to just stop with the charade and just take the hits.

Putting the banks into liquidation isn’t the nightmare scenario that people assume it is. With all existing banks gone, people would have no choice but to deposit their money in whatever new state bank was set up as an alternative, swelling it immediately with cash, and putting it in a good position to lend. In addition, letting the banks go will only affect those with deposits anyway, who are in general older and less productive people anyway. In some sense, the transfer of wealth from younger to older people over the last 15 years could be reversed by a general bank default. Done right, a general bank liquidation could do a lot for this country.

By the way, I said that Ireland should have spent a few million bribing the executives of Moody’s, in order to save the country millions more. I stand by that assertion. Bombshells like these cost the country dearly in the long run, and could have been avoided with a well placed bribe or two.

Paul Hunt notes that “the banks will continue to rely on the sovereign for equity support and on the ECB for liquidity support.” So have Moody’s downgraded the sovereign support or the ECB support? Probably both–because one should make up for the other–and that is very troubling indeed.

Why the Irish Times headline.

Rating agency Moody’s has downgraded long-term deposits at Irish banks by two notches to junk status.

I don’t undersatnd why deposits of any kind, long term or short term, have their ratings reduced.

Assuming that their is now a preferential system in place for all bank creditors (?) placing depositors above seniors bondholders, who are above juniors, who are abover equity holders, why would deposit ratings be hit?

Are we saying that such a preferential system does not yet exist.

If it does not exist and if depsoit ratings have been lowered again, the logic is that depositors are no longer safe. If that is what the ratings are saying then the position is critical. How could any depositor be expected to put money into a bank or keep money in a bank, if a supposodely credible ratings agency believes that he or she has little chance of getting that deposit back.

We will have queues within days.

Seems appropriate:

“Don’t cry for me Argentina
The truth is I never left you
All through my wild days
My mad existence
I kept my promise
Don’t keep your distance

And as for fortune, and as for fame
I never invited them in
Though it seemed to the world they were all I desired

They are illusions
They are not the solutions they promised to be
The answer was here all the time
I love you and hope you love me”

Let’s hope the ECB continues to love the Irish banks

@Peter Stapelton

We have a flurry of offers (time limited) by the banks in recent days. Double the interest in year two, interest up front etc. One offer I noticed yesterday had a capital guarantee by an Irish Bank (now rated junk). Some offer.
Caveat Emptor ,

IIRC 12-18mths ago Moodys were slow downgrading Greek debt (lagging other rating agencies). It’s possible they came under pressure to keep ratings at such a level to enable Greek debt to be ECB repo eligible.

Perhaps they’re just staying ahead of the curve this time 😉

From the BBC…reporting Moody’s concerns.
“Should the intended fiscal consolidation goals not be met, further rating downgrade would likely follow”
.Moreover, a further deterioration in the country’s economic outlook would also exert pressure on the ratings”.
So what rating then. -junk

3 years into the crisis and the govt* keeps saying things are settling and will improve and yet still the bad news comes.

*yes I know there is a new Govt. but can anyone tell the difference from the old one.

Looks like we are moving into end game with Greece
2 year 19.82%
Irish look to be holding up.

Greek 2 year just hit 20.02%. No small trick for an EU member to break the 20s.

Surprised no one has mentioned the Finish elections.

– Sovereign 10-Years at 9.8%.
– All banks rated as junk.
– Sovereign Debt Rating one above junk (Moody’s)
– Unemployment at 14.7% (Q4)
– GDP forecasts at 0.5%

It is hard to imagine if a complete role-reversal of Government policy over the last 3 years would have produced a worse outcome.

@ceteris paribus

Not so fast on the Caveat Emptor get out clause.

Our beloved banks operate to a higher calling in life and the old buyer beware does not necessarily apply, enlosed please find Regulators Consumer Protection Code – Regulatory Impact Analysis 2005 under the Common Rules for All Regulated activites…/consumer-protection-code/…/Consumer%20Protection%20Code%20Regulatory%20Impact%20%...

‘..6. Suitability
This provision represents a significant initiative, one that requires regulated
firms to behave in a manner that many firms might not if there were no
regulation. The rule effectively means that the principle of caveat emptor
cannot be the central tenet of the approach of regulated firms to their
relationship with the consumers of the products and services they provide..’

In simple terms selling a product which is not suitable is a no no. I’m just wondering is offering rates and deals as you suggest above in contravention of the Code given the banks and the Sovereigns current ratings?

Ireland you are not alone. S and P just lower US debt outlook to negative and just about everything is tanking except, you guessed it, metals.

@ Yeilds or Bust

Regulators Consumer Protection Code – Regulatory Impact Analysis 2005 under the Common Rules for All Regulated activites

Didn’t stop them before, don’t think it will now.

‘One more quarter, one more quarter.’

As for the downgrade.

Cui bono?

The european banks looking for as many deposits as they can get?

We obviously didn’t get a heifty enough brown envelope in on time.

I wouldn’t trust the one of these b*******.


@ Jake Watts

Regarding Finland.

A relevant Abstract.

“In the 1990s, Finland underwent a deep depression as its GDP dropped about 14% and unemployment rose from 3 to almost 20%.

This is a story of bad luck and bad policies. Bad luck took the form of external shocks: the collapse of trade with the former Soviet Union in 1991, but also sharp cycles in the OECD area. However, bad luck is far from being the whole story.

In the absence of bad policies, Finland would have experienced a recession, not a depression. Bad policies included a poorly designed financial regulation and mistaken reactions to the onset of the crisis.

Of particular interest is the role of financial factors in triggering the crisis and aggravating the effects of bad policies. Not only were consumption and investment spending hurt by the credit crunch, but there is evidence that the private sector’s indebtedness has increased structural unemployment, which explains why the recovery is proceeding with few job creations.

A number of general lessons emerge. They concern the deregulation of financial markets, the policy reaction to massive capital inflows and the role of employment policies.”

Author Info
Seppo Honkapohja
Erkki Koskela

Copyright Centre for Economic Policy Research, Center for Economic Studies, Maison des Sciences de l’Homme, 1999. IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut.

Obviously an obscure piece of economic literature.

At the risk of repeating myself. –

‘In 1991 the Finnish economy fell into recession. This was caused by a combination of economic overheating, depressed markets with key trading partners (particularly the Swedish and Soviet markets) as well as local markets, slow growth with other trading partners, and the disappearance of the Soviet barter system. Stock market and housing prices declined by 50%.

The growth in the 1980s was based on debt, and when the defaults began rolling in, GDP declined by 13% and unemployment increased from a virtual full employment to one fifth of the workforce.

The crisis was amplified by trade unions’ initial opposition to any reforms. Politicians struggled to cut spending and the public debt doubled to around 60% of GDP.

Much of the economic growth in the 1980s was based on debt financing, and the debt defaults led to a savings and loan crisis.

Total of over 10 billion euro were used to bail out failing banks, which led to banking sector consolidation. After devaluations the depression bottomed out in 1993.

They, I believe (open to correction), hauled themselves out of this crisis and after the hard won gains maybe it is understandable that a sizeable section (probably the hardest hit working man/woman), don’t see why they should pay for someone else ‘going on a bender’ when they had to pay for theirs.

Sound familiar? If only we could have got out for €10bn and in two years. Well devaluation is out and the banks are junk.

Anyone any ideas?

Anyone or organisation with a large 100k plus deposit in an Irish bank is putting their deposit at huge risk. If they decide that this level of risk is appropiate for a 4% return more fool them. I don’t really believe there are to many of these accounts left apart from the odd Johnny Sheepdogs and Auntie Acres so I don’t think there is going to be a huge rush of deposits out. The deposits that where when bend over lenny gave the golden harp guarntee have largely fled (isn’t that what we were supposed to stop) and replaced with ECB Euros.

Given that the called up share capital of the ECB is so small is not the ECB turning into a bit of Anglo as almost a quarter of its funds is tied up in the Irish Zombies?

This will have a negligible affect on corporate deposits leaving the banks. Once gone, that money will be hard to get back.

It will have a much greater effect on money entering the banks, especially from smaller company and private depositors.

The psychology of the situation is important. A new government, with a restructured banking system and no bad news for 6 months, will see people ‘forget’, suffer from recession fatigue, or just plain need some of the money overseas and so bring it back.

This resets the bad news clock, anyone considering bringing back some money will now think twice.


@Ordinary Man
Excellent documents. Still, no-one could have seen this coming… Finland is different etc. etc.

@yield or bust
Tying people in to two year deposits when the rating is junk with negative outlook would appear to be crossing the line. Wonder will they pull it or will our new regulator have something to say.
I don’t think it is the markets. They are only reacting to events like the German finance minister opening his mouth on Greek restructuring, then recanting and then the unnamed guys in Berlin leaking to Reuters. Is it any wonder that the Greek two year finished at 20.33%. Methinks the Germans want this done and dusted before elections and that events have overtaken the timeline outlined by Mr Munchu.

@ Jake Watts

Ireland you are not alone. S and P just lower US debt outlook to negative and just about everything is tanking except, you guessed it, metals.

This is down to the GOP putting a gun to the head of the US Treasury, though.

“Ireland as distinct from her people, is nothing to me: and the man who is bubbling over with love and enthusiasm for Ireland, and can yet pass unmoved through our streets and witness all the wrong and the suffering, the shame and the degradation brought upon the people of Ireland – aye, brought by Irishmen upon Irishmen and women, without burning to end it, is in my opinion, a fraud and a liar in his heart, no matter how he loves that combination of chemical elements he is pleased to call Ireland.”

As a UK citizen, I had money in Icesave as they offered better rates than the UK competitors at the time. I was happy as the deposits were guaranteed to a certain level by the sovereign. Then the bank went tits up due to too many loans to people like the tchenguiz brothers and the sovereign did not have the resources to meet the guarantee. Forgive my ignorance but it’s only the ecb ela holding this back here. Anyone who puts funds in an Irish bank at a time when the ecb has openly stated it’s wish to downsize it’s risk to Ireland is mad. That’s why Irish banks are paying 2% more than anyone else and Moody’s ratings won’t change this position.

Maybe I have been reading too much about the Risorgimento [150 years on] but I cannot resist quoting what Garibaldi wrote from his exile in Caprera:

“Non era questa l’Italia che sognavo; derisa all’esterno e miserabile al suo interno”.

Perhaps in 2016 we shall be saying:

“This was not the Ireland I dreamed of – derided by outsidres and inTERNALLY miserable.”

@ Hoganmahew

Probably right.

Maybe binoculars and a Phd. would have helped 🙂

@ Hoganmahew

Probably right.

Maybe binoculars and a Phd. would have helped? 🙂

If you wanted risk you could buy the bonds. If you want security the extra half point isn’t going to hack it.

I can only imagine a treasurer trying to answer one key question about his decision to place large amounts of cash in an Irish bank.

Q: “Why are you doing it?”
A: “Ehm well you see, ehm, it’s like this…..ehm.”

It’s coming around to the first anniversary of Greece’s bailout – and the heat is on again. It looks increasingly unlikely that Greece will be able to hold the line and the markets don’t believe it will either. Arthur Beesley, in today’s IT, argues that Ireland should try to hold the line:
but if Greece goes down that will become impossible and – in any event – any popular acceptance of the hairshirt will evaporate if the Greek debt burden is restructured, modified or adjusted in any way.

I’m amazed it’s taken so long to get to the end-game.

If Greece goes then it would seem that nothing in the world will convince the markets that we are not next.

Especially if we go for the limited actions on Anglo etc while promising the “pillars” bondholders are safe.

How much credibility will that have? Are we not now marked down for default as well.

The small peripheral dominoes will fall (or be allowed to be knocked over) if the EU Grand Panjandrums reckon the fire-break between them and Spain (and Italy and Belgium) is sufficiently wide. It seems that steps are being taken behind the scenes and the northern European politicos are moving to prepare their voters for the implications of this outcome. However, a dogged attempt may be made to keep Ireland out of it. It took six months last year after Greek went under for Ireland to succumb.

There are some wild comments being sprouted on this thread. Queues outside banks within days, bribing the ratings agencies. This sort of guff belongs on or in the pub.

@ Kenny K

Yeah I know!

There were wild romours October 2008 that the banks were bust – would you believe it ?


Agree with Kenny that some contributions to this thread are on the wild side.Post recapitalisation (and assuming the ECB will keep funding the banks which they probably have to do if the € is to continue) the argument can be sustained that the banks actually represent a better credit risk than the State.

A fly in the ointment would be any substantial holdings of Irish government bonds by the banks- the last accounts published by AIB showed this at 9.6billion,so a ‘haircut’ on this would cause a need for further recapitalisation(something not included in the stress tests).Of course these holdings may well have been liquidated as the funding crisis accelerated.

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