The €1 trillion in ultracheap three-year loans the ECB doled out in December and February was supposed to have stabilized the entire European banking system. It appears to be having the opposite effect.
European banks — especially those that rely on ECB LTRO financing — are bracing themselves for an imminent downgrade, according to an article in yesterday’s Wall Street Journal:
While Moody’s hasn’t said whether and to what degree it will cut various banks’ ratings, officials at multiple top European banks said they expect their grades to be knocked down at least one notch…
As part of its downgrade reviews, Moody’s is examining the degree to which banks are reliant on the ECB loans and “what are the banks’ abilities to wean themselves off that funding,” said a person familiar with the matter. Heavy borrowing from the ECB “prompts more intense scrutiny” from Moody’s about the banks’ financial health, this person said.
When Moody’s finally cuts these banks’ ratings, it will be costly: Royal Bank of Scotland estimated in a recent filing that a one-notch downgrade would force the bank to post an additional £12.5 billion of collateral.