Feeling Moody's

The credit agency Moody's Investors Service downgraded 12 UK banks on Friday morning following the UK government's decision to stop state aid.

Lloyds TSB Bank, Santander UK and Co-Operative Bank had their ratings lowered one step by Moody's, while Royal Bank of Scotland and Nationwide Building Society were cut two levels. Seven smaller building societies were cut from one to five levels.

Moody's also cut its ratings for nine moneylenders in Portugal, citing their exposure to government debt and a weak economic growth outlook. The cuts varied from bank to bank, with three of the lenders only receiving debt and deposit ratings downgrades, while the other six also had their standalone ratings reduced. Moody's said Banco Portugues de Negocios - which dodged the downgrades - was the only bank in the country with a positive short-term outlook.

No deeper crisis

In the case of the dozen banks in the UK - a country that's fighting its own debt problems but has not called for international financial assistance like Portugal - Moody's said its decision was based on the political environment, not the creditworthiness of the lenders.

"The downgrades have been caused by Moody's reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support ... for five larger, more systemically important financial institutions," the agency said in a statement.

Moody's said it now believes the British government would be "less likely" to support some firms if they got into trouble.

But it emphasized that the downgrades did not "reflect a deterioration in the financial strength of the banking system."

Two of the major banks mentioned were Royal Bank of Scotland and Lloyds Banking Group, whose shares fell 3.5 and 4 percent respectively in response to the downgrades, though they later recovered slightly.

Soothing noises

British Finance Minister George Osborne moved quickly to reassure the markets, insisting that Britain's banks still have plenty of money.

"I am confident that British banks are well capitalized, they are liquid," he told broadcaster BBC Friday morning. "They aren't experiencing the kind of problems that some of the banks in the eurozone are experiencing at the moment."

He said the downgrade was simply a reflection of altered circumstances, not indicative of a problem within the banks themselves.

Author: Ben Knight, Mark Hallam (AFP, dpa, Reuters)
Editor: Nancy Isenson