Fears of debt crisis hits UK

BRITISH banks are at serious risk of falling victim to sovereign debt pressures should the Greek crisis prove contagious, ratings agency Moody’s warned yesterday amid continuing turmoil in the Eurozone.

In a report on the consequences of the crisis for the banking systems of the four Club Med countries, Ireland and the UK, Moody’s said that the contagion risk could impose very real, common threats on the banking sectors of all six countries. Its analysts cautioned that the size of the British banking system left it particularly vulnerable to sovereign debt contagion.

“In the UK, the weakness of the banks has had a large impact on the economy given the banking sector’s relatively large contribution to GDP. Any impact on sovereign creditworthiness can therefore have a relatively strong impact on the banking system, and vice versa.”

The ratings agency said that Britain faced a difficult task of fiscal tightening at the right speed: too quickly and it could choke off the recovery, too slows and the financial flexibility of the sovereign may diminish as market opinion may move against the UK.”

Any downgrade would raise debt funding costs and put further pressure on bank profitability as individual bank funding costs would also be likely to increase.

But Exane’s Ian Gordon said that arguably banks are past their most vulnerable phase. “They are enjoying a relatively benign credit environment with the benefit of low rates and in this attractive and competitive environment, they either have returned or are returning to profitability. Other European banks are potentially more vulnerable.”