Moody’s tells us we’re junk – sorry lads, F all new there, we knew that already.

E.U. Vows to Back Banks That Fail Stress Tests
Thierry Roge/Reuters

Jacek Rostowski, finance minister of Poland, which holds Europe’s
rotating presidency, argued that Europe now had “a banking system that
is in much better shape than it was last year.”
By STEPHEN CASTLE
Published: July 12, 2011

BRUSSELS — European officials vowed on Tuesday to support banks that
fail stress tests but left unresolved deep disputes that have held up
a second rescue package for Greece.
Related

The results of the stress tests, which are scheduled to be released on
Friday, could pose a headache for the 27 European Union finance
ministers who met here to discuss ways to ease the region’s financial
turmoil.

Olli Rehn, the European Union’s commissioner for economic and monetary
affairs, said that once vulnerable banks were identified they “must
recapitalize themselves, or be recapitalized or restructured.”

In a statement, the finance ministers said that backstop mechanisms
would aid struggling banks.

“These measures privilege private sector solutions but also include a
solid framework for the provision of government support in case of
need, in line with state aid rules,” the statement said.

Officials insist that the exercise is more stringent than tests done
last year, which failed to reveal a looming banking crisis in Ireland.
The new tests will include a review of how lenders would handle a 0.5
percent economic contraction in the euro zone in 2011, a 15 percent
drop in European stock markets and potential trading losses on
sovereign debt.

The officials insist that Europe’s banks and governments are better
prepared this time around.

Jacek Rostowski, the finance minister of Poland, which holds the
European Union’s rotating presidency, argued that Europe now had “a
banking system that is in much better shape than it was last year.”

A fresh example of the stress that banks will need to endure came late
Tuesday. Moody’s Investors Service cut Ireland’s credit rating to junk
status, adding it to Portugal and Greece on the list of euro area
countries whose ratings are below investment grade.

Ireland’s rating was lowered to Ba1 from Baa3, and Moody’s signaled
that the country faced further downgrades in the next year. Standard &
Poor’s and Fitch Ratings still have an investment grade rating for the
country.

Moody’s said Ireland would most likely need another bailout and that
policy makers would force the private sector to shoulder some of the
burden.

“The prospect of any form of private sector participation in debt
relief is negative for holders of distressed sovereign debt,” the
company said in a statement. “This is a key factor in Moody’s ongoing
assessment of debt-burdened euro area sovereigns.”

After the downgrade, the Irish agency that manages the country’s debt
said that it had sufficient money from the country’s first bailout to
cover its financing requirements until the end of 2013.

The downgrade of Ireland was certain to raise investor fears that the
Greek debt crisis would spread. European officials raised the stakes
on Tuesday by pressing for an emergency meeting of euro zone leaders
on Friday, the same day that the stress test results are expected to
be announced.

The plan represents a risky gamble by Herman Van Rompuy, the president
of the European Council. If the meeting is held on schedule and fails
to answer the crucial questions about Greece that were left unresolved
by European finance ministers on Monday and Tuesday, it could end up
unsettling the markets even more.

A gathering of finance ministers from the 17 countries that use the
euro ended on Monday with a declaration suggesting that their bailout
fund would be expanded and could be used to buy sovereign bonds from
Greece and other deeply indebted countries.

That kind of declaration —rejected months ago because of German
objections — has forced its way back onto the agenda because of the
growing turmoil in the financial markets and fear that Spain and Italy
could also be victims of Europe’s debt crisis.

As the meeting on Monday was getting under way, George A. Papandreou,
the Greek prime minister, sent a letter to Jean-Claude Juncker, the
prime minister of Luxembourg who leads the group of euro zone finance
ministers. The letter was made public on Tuesday.

“If Europe does not make the right, collective, forceful decisions
now,” he wrote, “we risk new, and possibly global, market calamities
due to a contagion of doubt that could engulf our common union.”

“ ‘Crunch time’ has arrived,” he added, “and there is no room for
indecisiveness and errors.”

At their meeting in Brussels, the finance ministers outlined multiple
options to reduce the burden on countries like Greece that have
accepted bailout loans. Options included cutting the loans’ interest
rates and extending loan maturities, as well as helping the countries
buy back their bonds trading in the market.
Related

Those possibilities reflect a growing consensus that heavily indebted
countries cannot afford their current obligations and need some relief
to avoid being condemned to endless rounds of austerity and no growth.

Crucially, however, the ministers left unresolved the continuing
dispute over how much the private sector should help pay for a second
Greek bailout. A large role could cause ratings agencies to declare
the country to be in selective default.

The European Central Bank has opposed a large private section
involvement, and restated its position in the statement to the euro
zone finance ministers.

Germany and the Netherlands have pressed for a substantial role by the
private sector — something they see as essential if they are to sell
the Greek bailout to skeptical voters at home.

Jan Kees De Jager, the Dutch finance minister, said that a plan that
might be classified as a selective default was no longer ruled out.

“Obviously, the European Central Bank has stated in the statement that
it did stick to its position,” he said, “but the 17 ministers did not
exclude it any more in exploring the options for private sector
involvement, so we have more options, a broader scope.”

The idea for Friday’s meeting arose after the failure to broker a deal
on the role of private investors, said an official with knowledge of
the talks but who was not authorized to speak publicly. “The idea is
to discuss it on the highest level,” the official said.

But other officials say they fear that the plan could backfire if,
with little time for preparation, the differences between the German
government and the European Central Bank cannot be bridged.

“It’s extremely high risk,” said another official, who was also not
authorized to speak publicly, “because my understanding is that the
work is not ready and every journalist and market player will be
looking for a result on Friday.”

Though Nicolas Sarkozy, the French president, had been pressing for
such a meeting, other leaders were taken by surprise, the official
added, suggesting that bank stress test results would raise the stakes
further.

A third European Union official said that if the meeting were
confirmed, Mr. Van Rompuy would propose options to overcome
differences between the German government and the central bank, though
he declined to elaborate.

Niki Kitsantonis contributed reporting from Athens.