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On Monday, Moody's downgraded 28 Spanish, following its downgrade of Spain's sovereign rating on June 14. Moody's cites the reduced credit-worthiness of the sovereign and expectations of further write-downs of commercial real estate-linked assets as reasons for the downgrades.

Of note were the downgrades of some of the biggest banks. Banco Santander (NYSE: SAN) traded down 2% on Tuesday after having its rating cut from A3 to Baa2, a two notch downgrade which places it in upper medium-grade territory. BBVA (NYSE: BBVA) was cut three notches to Baa3 from A3, which also classifies its bonds as upper medium-grade. Caixabank, the conglomerate of small banks created by the government, was cut from Baa1 to Ba1, a three notch downgrade. Banco Popular was downgraded a whopping four notches from Baa1 to Ba2. (After the downgrade, the bonds of Caixabank and Banco Popular are now junk status.) Lastly, Bankia was downgraded from Ba3 to B2 and remains in junk territory.

Markets seemed to shrug off the news, with iShares MSCI Europe Financials Index (NYSE: EUFN) trading down approximately 0.5%. The EUR/USD is also lower on the day, trading at 1.2465 from as high as 1.2530. Traders who see more downgrades of either sovereigns or banks would be wise to short either of these, as sovereign downgrades usually lead to bank downgrades.

In all, 28 banks had ratings actions taken. Four banks had ratings cut four notches, while most cuts were either one or two notches. Bank downgrades will have an interesting effect on euro flows. As downgrades occur, banks are forced to post more collateral on swaps such as repo's. If they are lacking excess cash to fulfill these obligations, as many are, they must borrow it or sell assets for it, thus potentially putting a bid under the euro over the next few days as this dynamic plays out. Investors may actually see the euro rise slightly heading into the summit on Thursday for this reason.

Posted-In: Long Ideas News Bonds Short Ideas Downgrades Futures Forex Global Best of Benzinga

 

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