• Banks speak out over downgrade risk
• Spanish audit does little to move markets

A number of the world’s biggest banks – including Barclay’s, HSBC and Royal Bank of Scotland – felt the hand of Moody’s upon their shoulders last night, with credit ratings downgraded across the board.

The ratings agency cut British bank Barclay’s rating by two notches last night, while HSBC and RBS suffered the loss of a notch each. Rumours of an expected downgrade began emerging late yesterday, with the single currency taking a hit on live forex charts within minutes of the leak. “Yesterday we saw heavy gains in the Euro against the dollar”, said Craig Erlam, market analyst at Alpari UK. “The poor data out of the Eurozone and US did little to maintain recent confidence.

“The downgrade rumours though were the dagger to the heart. As soon as these were leaked we saw heavy losses in the single currency, dragging it below 1.26 after opening above 1.27 earlier in the day. The pair found support around 1.2528 before recovering slightly”, he added in an emailed note to ForexSpace.com.

The official announcement from Moody’s was made after US markets had closed because the majority of banks affected were American. The ratings agency admitted that it was prompted by further worry over the state of euro zone bank lending amid the ongoing crisis.

Banks speak out over downgrade risk

A number of banks have now spoken out over fears that the new ratings will make it harder for them to borrow money commercially.

Others have made formal statements to express their disdain at the decision by one of the three largest ratings agencies. In a statement, RBS said: "The group disagrees with Moody's ratings change, which the group feels is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile."

While RBS estimated that the downgrade could mean it would need to find an extra £9bn in collateral for its debts. Lloyds said it believed that the change would have "limited impact on our funding costs and market capacity". US bank Citigroup said it "strongly disagrees" with Moody's decision. Adding salt to an already gaping wound, Moody’s also added that it was putting a number of the banks on a negative outlook, which represents a clear warning that they could be downgraded again in the near future. The decision, it said, came as a result of “clear intent” from governments to support their banks less going forward.

Spanish audit does little to move markets

The multiple bank downgrades came amid the news that external auditors had judged that Spain would need around €51bn to €62bn to cover the country’s banks’ immediate needs, though admitted that this could be the beginning of a wider bailout for Spain as a whole.

“The European markets have had a lot to digest this morning after the mass downgrade of global banks by credit rating agency Moody’s and the results of the Spanish independent bank audit”, observes Kathleen Brooks, research director of top forex broker FOREX.COM, adding that the audit results – which came well within the 100bn EU bailout pledge – have had a limited effect on the market this morning.”

But that is not where the story ends for traders: “Markets need to find out: what is the worst case scenario and are we headed towards it now? The Luxembourg Finance Minister said that Spain will submit an aid request in the next few hours to apply for bailout funds to prop up its banking sector.

“Thus, maybe the current environment is bad enough for Madrid, and if things get any worse in Spain then the EU may need to provide more than EU 100bn in bailout funds.”

Sarah Cox. Markets Writer, ForexSpace.com.