Ratings agency Moody's said on Tuesday it could downgrade the subordinated debt of 87 banks across 15 European Union nations on concerns that governments would be too cash-strapped to bail out holders of riskier bank debt in times of stress. Moody's said the greatest number of ratings to be reviewed were in Spain, Italy, Austria and France. The review could lead to an average potential downgrade of subordinated debt by two notches, and junior subordinated debt and Tier 3 debt by one notch, it added. Holders of subordinated debt are further back in the queue than owners of senior debt when it comes to a claim on a bank's assets, thus making it a riskier class of debt. "Moody's believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints," the agency said in a report.
Moody's noted there had been recent instances where losses had been imposed on subordinated debt holders without any significant contagion to other liability classes. "Consequently, there would need to be very clear reasons for Moody's to consider retaining an assumption of support in subordinated debt ratings," it warned. Nations affected by review were listed as Austria (nine banks), Belgium (three), Cyprus (two), Finland (three), France (seven), Italy (17), Luxembourg (three), Netherlands (six), Norway (five), Poland (one), Portugal (two), Slovenia (two), Spain (21), Sweden (four) and Switzerland (two).
Moody's also warned that the risk to ratings on subordinated debt could extend outside the borders of the European Union. "Moody's will also review to what extent other closely integrated markets outside the EU, such as Norway or Switzerland, are affected by this change in its support assumptions," it said.