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Nick Ogden - Novmo.com

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What does the Moody's downgrade really mean for businesses?

31 July 2012  |  2944 views  |  0

For months now we have been fortunate enough in the UK to sit back and watch as Moody's, the bank rating agency, set about a mission of degrading poorly performing banks. But all this changed last month, as a further barrage of bank downgrades saw Moody's downgrade 15 global banks and security firms - including some banks we are all particularly familiar with. Two giants of the UK high street, RBS and Barclays, both saw their ratings drop.  As potentially embarrassing as this may be for the banks involved, many will be sat at home wondering - well, what does this mean for me? For businesses, this will be of utmost concern.

Imagine that your personal credit rating was poor - perhaps you have a bad history of paying off debts and bills - this would do one of two things to your ability to borrow money. Either lenders will push up the cost of your borrowing, or put a stop to it altogether.  The same can be said of banks that have been downgraded. Given that the cost of borrowing for banks is likely to increase, it would be natural for businesses to panic that this, already fragile, form of funding, may close entirely. Banks certainly don't currently have a strong reputation for lending to small businesses - one only need look at the failure to meet their Project Merlin goals.

Before panicking, however, it is worth, for a second, pointing out the context of the downgrades.  For one thing, these were unlikely to come as a surprise to those involved. In fact, many got in there early with their criticisms of Moody's analysis, claiming it is 'backward-looking'. What's more, a lot of banks have now been downgraded, and, as BBC Business Editor Robert Peston points out: "those who control vast pots of cash have to put their money somewhere.”

So, at present, it may be that there is nothing to panic about. What's more, both the Bank of England and HM Treasury have recently announced schemes to boost bank access to cheap loans.  Naturally, there is no way of knowing whether banks will pass these cheap loans on or simply hold on to them to boost their own capital. This is where there is a need for legislation. Moody's is a useful tool in these difficult times, and one that customers would be wise to bear in mind, without letting it run their banking choices. Yet without legislation setting a minimum rate of lending, I'm afraid Moody's could end up having an adverse effect - particularly on the UK's small business community who need access to affordable banking and funding facilities more than ever.

 

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