Moody's Downgrades Italian Banks by One to Two Notches

On Thursday July 12, Moody's Investor Services downgraded the Italian government's credit rating to Baa2 from A3. Late Monday, Moody's downgraded the Italian banking sector. This move comes largely expected, as ratings of banks generally get downgraded after the sovereign rating.

Moody's downgraded 13 Italian banks including the two largest banks Unicredit and Intessa Saopaolo to Baa2 from A3, in-line with the sovereign. UniCredit and Intesa may face further downgrades Moody's said Monday in a statement.

Moody's kept the ratings of the biggest banks in-line with the sovereign showing the ever-growing link between the sovereign governments in Europe and the banking sector. As Moody's noted: "Despite UniCredit's substantial international activities, its important exposure to its domestic market means that its stand-alone rating is constrained by the level of the sovereign rating. Intesa's business is almost entirely domestic in nature.”

On Tuesday, Italy's debt agency head Maria Cantana said that at recent auctions demand from banks has been in-line with the past. As banks continue to buy the government's debt, the two become even more linked. However, after downgrading the Italian government, Moody's cited that further downgrades were possible if the government did not curb deficits and if bond yields stayed elevated. For the banks, they cited the increasing difficulty for the Italian government to support the banks as one key reason of the downgrade.

Italian 10-year bonds initially sold off on the news but later rallied. The yield on the benchmark 10-year bond rose to a high of 6.1346 percent before retreating to as low as 5.9939 percent. Italian stocks rose in Milan trading measured by the MIB Index, which gained 0.34 percent in afternoon European trading.