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Fitch downgrades Lloyds and RBS debt

Fitch Ratings has downgraded the subordinated debts of Lloyds Banking Group and RBS after the EU Commission revealed that it could force banks to default on coupon payments.

This week Northern Rock revealed it was to defer payments on its subordinated debts, a cost-saving decision available to UK nationalised banks through the Banking Act.

But the EU Commission revealed last month that it could force state-aided banks to default on certain payments in favour of more senior debts.

The EU Commission states that: “banks should not use state aid to remunerate equity and subordinated debt when those activities do not generate sufficient profits” which means that it: “may favourably regard the payment of coupons on newly issued hybrid capital instruments with greater seniority over existing subordinated debt”.

As a result, Fitch Ratings has downgraded the ratings of hybrid securities at Lloyds Banking Group, RBS, ING Group, Dexia Group, ABN Amro, SNS Bank, Fortis Bank Nederland and BPCE.

Moody’s has also downgraded the debt of ING, thanks to its: “assumption of a high probability of coupon suspension on its securities as a result of the ongoing discussion between ING Groep and the European Commission.”

Fitch Financial Institutions managing director Gerry Rawcliffe says: “In Fitch’s view, the capacity for the Commission to materially influence both the capital remuneration policy and the future shape of state-aided banks should not be under-estimated.”

This comes as both RBS and Lloyds’ restructures are negotiated with the EU Commission. EU Competition Commissioner Nellie Kroes recently warned that the banks would have to be cut down. She said: “The need for competitive market structures is stronger than ever; the likelihood of significant divestments by RBS and Lloyds is strong.”

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