The mass downgrades of major global banks by ratings agency Moody’s Investors Service Thursday night don’t appear to have caused the downwards market movements one might have expected.
While the stocks of the banks affected, including Citigroup, Morgan Stanley, HSBC, and Goldman Sachs, fell slightly across the board yesterday, they didn’t suffer the huge plunges some feared, suggesting that much of the risk of a downgrade was already factored into the price. Some stocks actually rose in after-hours trading.
U.S. banks’ credit spreads were tighter following the downgrade with Morgan Stanley’s bond spreads around 25 basis points tighter — usually a positive sign for the stock’s future.
One of the reasons the Moody’s downgrades didn’t affect markets too badly is that it’s not really a shock. The ratings agency flagged in February that it was considering a mass downgrade of the banks. News of the downgrades started leaking out Thursday afternoon, before European and U.S. markets closed.
Analysts at Bernstein argued that the downgrades are “largely reflected in equity and credit markets” and pointed out that credit default swaps for RBS and Lloyds are already trading at “junk” levels. RBS criticized Moody’s as “backward looking” in a statement.
“The only beneficiary we see from this exercise is HSBC. With a one notch downgrade as compared to the two notches at JPMorgan and Citi — it increases HSBC's strength as a preferred counterparty for its markets and transaction banking business,” it wrote in a research note.
Ratings agencies such as Moody’s have been criticized throughout the current economic crisis for not responding quickly enough to warning signs about the global economy.
“If Moody’s designed a car, you’d have the driver’s seat facing backwards,” Alan Miller, founding partner at SCM Private, told CNBC.
“The problem is the timing. They’re just too late, and by the time they get published the markets have already reacted, and the only people left to react are the big funds who are linked to these things,” Ralph Silva, director at Silva Research Network, told CNBC. “These industries were developed in the 1950s when portfolio decisions were made on a quarterly basis — now they’re made on a quarter-of-a-second basis.”
Banks could however still feel the pain of the downgrades. The fact of the downgrade may further complicate their funding, already a problem for investors.
—By CNBC’s Catherine Boyle. Twitter:@catboyle01