Government measures should stabilize global banking markets
October 21, 2008:
The comprehensive measures governments around the world will carry out to support financial institutions should stabilize the banking industry's day-to-day operating environment and unfreeze debt markets, said Standard & Poor's Ratings Services in a report published recently "Sweeping Government Measures Should Restart Global Banking Markets."
"In our view, this should help restore confidence in the world's banks, allowing investors and counterparties to begin assessing banks again on their business strengths," said Standard & Poor's credit analyst Scott Bugie.
The measures should underpin bank creditworthiness in the short term by shoring up liquidity and augmenting the sector's regulatory capital. We do not expect, however, that these actions in themselves will improve fundamental earnings and asset quality, which will remain under pressure for financial groups in the U.S., Western Europe, and several countries in Eastern Europe and Asia. In addition, the differences among various countries' support packages, and their complexity, may delay the measures' initial impact.
"We view positively the support measures from our credit perspective, particularly since they greatly reduce financial institutions' risk of a rapid loss of funding and sudden default," said Mr. Bugie.
The proposed government measures collectively represent a seismic shift in the global banking industry because they provide explicit evidence that states around the world stand behind their banking industries. In our opinion, this shift alone should help restore confidence in the debt markets. However, the support measures are designed to be temporary and to be mostly paid for at market prices. They also differ substantially from jurisdiction to jurisdiction, and banking groups will partake of the support to varying degrees, or not at all. So, although the measures stand to restore confidence, their effectiveness may vary from country to country and bank to bank.
Changes of this magnitude will be more complex to implement than they appear at the beginning, and they may have unpredictable consequences. Governments, in our view, will have to work out the details of the rapidly announced support measures over the next few weeks.
(This is press release of Standard & Poor's)
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