Codswallop – Aaa ratings all round

The credit rating agency Moodys this week released the initial output from its widespread review of the banking sector. Whilst the expected outcome had been for a number of banks to benefit from upgrades to their ratings, the market was taken aback by the initial set of rating revisions. The process is set to take place over seven weeks and will cover approximately 1,000 deposit taking banks in over 90 countries.


The initial release on the 26th February saw banks in the Nordic region receive upgrades by as many as four or five notches, some to Moodys’ highest rating of Aaa, ranking them alongside sovereign bond issuers such as the UK, Germany and the US. Moodys’ rationale is predicated upon its new Joint Default Analysis (JDA) approach. Moodys claim that “banks will receive national government support, as well as other major forms of external support such as parental support and support from regional and local governments and cooperative and mutualist groups” which have led to the rethink.

The reaction to the upgrades has been twofold. Firstly as you’d expect, those banks so far benefiting from upgrades have seen the value of their bonds rise in response. Secondly, Moodys have come in for a great deal of criticism. Many investors have questioned the lack of transparency in the new process. It had previously been believed that Moodys were already factoring in state and/or parental support. Investors have questioned for example whether a country such as Iceland (with a population similar in size to Hull, and an economy based around cod) has the ability to support banks which has liabilities three times the nation’s Gross Domestic Product. The new process has also made it far more difficult to distinguish between banks on a credit fundamental basis given the added parental/governmental factor.

The ongoing process is expected to lead to further upgrades, further confusion and no doubt further criticism. One disgruntled bond trader has created this clip. Warning – may only be funny to bond geeks.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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