Moody's accused of undermining own ratings system

Moody's Investors Service was yesterday accused of undermining its own ratings system by upgrading 16 European banks to its top triple-A status.

The US ratings agency surprised analysts with the scale of its changes, which led to some sharp moves in the markets and led to questions over the validity of its new system.

Nigel Myer, an analyst at Dresdner Kleinwort, said: "Moody's gave much bigger upgrades than we thought likely. Issuers may not object to free upgrades, but others are unlikely to be so excited. There is a danger that by removing the ability to meaningfully discriminate between banks, Moody's may actually become less useful to the market."

In a note on the changes, Royal Bank of Scotland (RBS) said: "What is the impact of this? Moody's is rapidly making itself redundant."

The Icelandic banks, Glitnir, Kaupthing and Landsbanki, made the biggest moves in the markets, as they received the largest upgrades of four or five notches to Aaa. Most analysts expected upgrades to be one or two notches. The cost of protecting the debt against default of the three Icelandic banks fell sharply, while their shares rose about 3 per cent. The Icelandic krona reached an 11-month high against the dollar and a three-month high against the euro.

Antonio Carballo, co-head of European banking at Moody's, defended the reforms, saying that no leading bank had defaulted in Europe for the past 50 years because governments typically stepped in to save them.

The new system, in which ratings on 43 banks have been upgraded, aims to take account of the willingness and ability of a state to support a troubled bank.

RBS said: "While defaults in European banking have not exactly been legion in recent years, creating Aaa-rated banks across the board essentially means that there is no risk in investing in financials, that buying a senior Kaupthing bond, for example, is in effect risk-free, the same as gilts or bunds." It argued that the lack of defaults in recent years had not always been down to state intervention.

The reforms are part of the first stage of a process in which the ratings agency will re-assess its ratings on more than 1,000 banks in more than 90 countries.

- (Financial Times service)