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Royal Bank of Scotland- Rating Downgrade

Dec 07 2011

Royal Bank of Scotland

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The notion that megabanks like the Royal Bank of Scotland are too big to fail apparently isn’t as easy a sell to as it used to be. Everyone hopes that the European Union will be unable to save foundering debtor nations Greece and Italy from default, but no one can see how. And fears are growing that default is inevitable.  Meanwhile, governments, which are cash poor to begin with, are responding  to  their public’s growing impatience with bailouts by sending signals that they won’t come to the rescue of any financial institutions left holding worthless debt. As a result, for the third time in two months the Royal Bank of Scotland has seen its credit rating lowered by one of the big debt rating agencies, not because of any change at the bank itself, but because debt rating agencies are factoring government reluctance to engage in further bailouts into their overall assessments  of financial institutions. This is why Standard & Poors recently downgraded the RBS from an A to an A-  rating following  similar moves by Moody’s and the UK agency Fitch’s in early October.

Of course the RBS isn’t alone, the group of 15 international investment institutions included Bank of America, Goldman Sachs, City group and Morgan Stanley among US based investment banks, as well as Lloyds, HSBC and Barclays in the UK . What’s especially troubling for RBS is that it was one of only two European banks to have its short term credit rating cut, the other was Lloyds. What the downgrade means is that the RBS will be forced to come up with more scarce collateral for its daily trading, if it wants to continue trading at all.

There had been hopeful signs for RBS and the other similarly situated banks immediately following the credit reduction, when global markets responded positively to the move by the Fed and five other central banks easing up lending to Banks suffering from the debt crisis. So Wall Street is happy again, for the moment, and the RBS may enjoy a brief respite from its credit problems. Nevertheless, it’s hard to say how long this move by the Fed, which is basically printing money according to its critics, can forestall the inevitable. Neither borrowing your way out of debt, nor paying off debt with inflated money, can lead to anything but trouble in the long run. The problems at the RBS are partially due to the way these super institutions do business, but they are also tied intimately to the Eurozone economy. A fact which makes the current efforts by EU countries to save their common currency a matter of enormous interest to the RBS and her fellow super banks.

Jack Myers is a long time banking associate, having worked as a teller in his younger days and currently as a financial associate. He helps to promote find uk phone numbers, a website that provides visitors with information such as the Royal Bank of Scotland customer service number.

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