Italian Banks Downgraded
Moody’s downgraded the ratings of 26 Italian banks at the end of the US session as part of a wider review of the ratings of 114 European banks. The ratings agency cited “increasingly adverse operating conditions”, “mounting asset-quality challenges” and “restricted access to market funding”. Ten banks saw their rating cut by 1 notch, eight banks were cut by 2 notches, six banks were downgraded by 3 notches, while a further two saw a four-notch downgrade. EURUSD dropped 15 pips on the news, and we would not be surprised to see further euro weakness today especially given the political stalemate in Greece. Political negotiations are set to continue on Tuesday, with SYRIZA confirming its attendance – sustaining slim hopes that a coalition can still be forged, an outcome that might offer temporary relief for the euro. Yet, there does not appear to be a lot of scope for policy compromises going forward, with SYRIZA already rejecting the President’s proposal for a government of technocrats. Furthermore, SYRIZA’s staunch opposition to the current bailout agreement suggests that even in the unlikely event that a June election can be avoided, there may still be a showdown with the EU/IMF. More immediately, the focus will be on whether the Greek government will fully repay the EUR0.4 bn foreign law bond that matures on Tuesday, though the sense is that Greece will aim to avoid a technical default at this stage. We lowered our AUDUSD forecasts overnight, taking the 1m down to 1.00 (prev. 1.05) and the 3m to 0.97 (prev. 1.00). The lower currency forecast profile reflects downgraded UBS China growth forecasts as well as our anticipation that risk aversion is likely rise further on the back of continued political paralysis in Greece.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank