Moody's downgrades indicate worst days ahead

It marked down leading Greek banks by two notches and Slovenian debt by one notch.The agency downgraded the main Greek banks by two notches, citing increased risks of losses on their holdings of Greek debt.Moodys Investors Service also warned of an increased prospect that the Greek economy will worsen, and said that privateholders of Greek debt, meaning banks, might suffer further losses.It also downgraded the rating of Slovenias sovereign debt by one notch, warning of an increased risk that the government might have to intervene again to support the banking system.Moodys Investors Service cut Slovenias rating from Aa2 to Aa3 and also placed the countrys debt on negative outlook, meaning that it could cut the rating again after further analysis.These downgrades, as the eurozone debt crisis worsens raising deep concerns about the strength of some banks, follow downgrades by Standard&Poors in Italy this week, first downgrading Italian sovereign debt and then seven top Italian banks.The Greek banks downgraded on Friday were National Bank of Greece (NBG) bank, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, the Agricultural Bank of Greece and Attica Bank.A subsidiary of French bank Credit Agricole called Emporiki bank, and a subsidiary of French bank Societe Generale called Geniki suffered less, and were attributed ratings of B3 instead of B1.All of the ratings had been placed under review on July 25 for a possible downgrade.The International Monetary Fund and now the European Commission say that some European banks need recapitalising, and many European bank shares have plunged recently on concerns about their holdings of eurozone debt and their ability to weather any new financial storm.Moodys said in its comment on the Greek bank downgrades: Moodys believes that private creditors may incur substantial economic losses on their GGB (Greek government bond) holdings beyond the terms of the current debt exchange.That was a reference to an EU-IMF second rescue for Greece on July 21 under which private banks accepted a reduction in the amount Greece will repay on its debt.Moodys also said its decision had been motivated by a recent fall in the value of Greek bonds held by these banks. It warned that there was a rising risk of significant further losses on these holdings.It was also likely that the amount of doubtful loans on the books of these banks would rise with the crisis, particularly because new losses could emerge as a result of audits by the central bank and external experts, Moodys commented.The agency also expressed concern about a fall of deposits managed by the banks and about the fragile nature of their sources of funding.Regarding Slovenia, Moodys pointed to increasing risk that the government may be called upon to provide additional support to the banking system.The ongoing financial crisis has exposed vulnerabilities in the banking systems asset quality, capital adequacy and short-term external funding model.The agency also pointed to political uncertainty and risks for the enactment of budget and economic reforms to control debt.Slovenias finance ministry issued a statement saying that the (acting) government was not surprised by the downgrade since it had been warning for months over the consequences the rejection of the much needed structural reforms may have.