Woolnough: More bank downgrades on horizon

B(L)ANK CHEQUES

M&G's bond veteran Richard Woolnough considers the impact of Moody's downgrade of a raft of UK financial institutions, and why the government will no longer sign blank cheques for the banks.

Rating agency Moody’s today downgraded a swathe of UK banks. The reasoning behind this was not the weakening of the economy, nor the fact that, according to Mervyn King, we are in possibly the worst financial crisis ever. It was due to the changing nature of the blank cheque that banks receive from their implicit support from the state. The rating agencies have recognised that government policy has shifted and that state support for banks is becoming limited and dependent on their systemic importance to the UK economy. This is not new news, and the increasing risk that bank bondholder...