What Moody’s downgrade of banks means

2014-08-20 15:17

If you thought African Bank was an isolated case of a single company lending recklessly and not having enough reserves, yesterday’s ratings downgrade of the big banks proved otherwise.

Moody’s has downgraded South Africa’s big banks not only because of their exposure to African Bank (they are all taking a knock in their bail-out of the microlender) but also because Moody’s can no longer assume that the Reserve Bank will fully protect creditors. It did not do so in the case of African Bank.

The stability of South Africa’s banking system is one of the main pillars on which the country is ranked internationally, so the downgrade is a blow notwithstanding indications from the banks and the Reserve Bank that a downgrade was not warranted or was an overreaction.

The banking sector is well managed and well regulated. But there is clearly concern that this is not enough. Easing of lending criteria over the past few years has significantly weakened many companies’ ability to collect loans. Comparisons with the subprime crisis in the United States are not far-fetched at all.

The mining strike has compounded the effects of reckless lending and poor economic growth because people just could not repay their loans. Expect bad news from companies that extend credit, such as Ellerines, which is now in business rescue.

Ratings agencies are sometimes rightly criticised for making wide-reaching decisions based on superficial information. This is a matter for debate but does little to change the fact that once there is a downgrade the consequences in terms of reputation and ability to borrow immediately kick in.

Ratings agencies should also not necessarily be dismissed just because those who are affected by them treat them as uninformed. They warned us about the unsecured lending bubble, which has burst.

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