Fitch Cuts Council of Europe Development Bank AAA Rating

Fitch Ratings has taken away another “AAA” rating. The ratings firm has now downgraded the Council of Europe Development Bank’s Long-Term foreign currency Issuer Default Rating to “AA+” from “AAA.” This may not be a shock as put the CEB’s rating on negative watch last December. Fitch has now removed it from Rating Watch Negative and the outlook is now Stable. Fitch affirmed the Short-Term IDR at ‘F1+’.

Today’s report noted, “The downgrade primarily reflects weaker capitalisation compared to peers together with a weakening of the CEB’s asset quality due to the multi-notch downgrades of several borrowing countries in the European Union in 2012, in particular Spain (‘BBB’/Negative), Italy (‘A-‘/Negative) and Cyprus (‘BB+’/Negative).”

It is important to note that Fitch pointed out that the CEB had no impaired loans and also that it has never written off any loan, Still, its asset quality is on a potentially declining trend as the average credit rating of its loan portfolio has decreased to “BBB+” as of end-August 2012 from “A-” at the end of 2011.

Fitch also pointed out that the quality of the CEB’s liquid assets held in treasury securities has “markedly declined” this year. To prove the decline, the rating shows that securities and bank placements which were rated as “AA-” or higher were only 54.2% at the end of August versus 74.6% at the end of 2011.

FULL DOWNGRADE FROM FITCH

We would note that this downgrade is still perhaps a rather generous rating. Fitch’s homepage clearly says warns that the Eurozone bonds and credit default swap spreads may see a bumpy few months. That is particularly for the PIIGS. It states, “News flow in the coming months may potentially contribute to further price volatility for Eurozone bond and CDS spreads, according to Fitch Ratings in a new report. While recent Eurozone bond and CDS spread tightening is not news, what everyone may not realize is the how much relative trading levels have changed over the past year or so. Portugal and Ireland as well as Spain and Italy are notable examples of this trend.”

The CEB is an MDB established in 1956 by members of the Council of Europe, a 47-member organisation founded in 1949. Its mission is to provide low-cost financing through loans and guarantees to its member states for social, environmental and educational purposes. Based in Paris, France, it employed 175 staff at end-2011.

We took a look at the 2011 annual report for the CEB and it showed that the balance sheet at the end of 2011 was roughly 26 billion Euro against liabilities of almost 24 billion Euro.

JON C. OGG