How Does Moody's Know Balance Sheet Of EU Banks? It Doesn't

Moody’s has been called arrogant before. It has misread the value of mortgage-backed securities and re-rated troubled balance sheets of corporations and nations well after the bad news that affects them is out.

Now, the troubled rating agency has offered its opinions on the stress test of the largest bank in Europe. It can hardly say that it has any real knowledge of these balance sheets

Moody’s writes:

Of the 91 EU banks subject to the EBA’s 2011 stress test, Moody’s believes that 26 rated banks have a heightened risk of needing extraordinary external support, as indicated by their non-investment-grade standalone credit strength (standalone bank financial strength ratings at or below D+, mapping to Ba1 on the traditional rating scale). Moody’s expects the banks that fail the EBA stress test will be among those lower-rated banks, or among the non-rated banks included in the EBA stress test.

The European Banking Authority does not know what the final ratings will show. Moody’s, no matter how good its models are, can’t claim it has any credible data that is better.

Douglas A. McIntyre