Moody's Warns Of Sovereign Contagion Risk To Portugal, Spain, Italy, Ireland, UK Banks

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The risk of sovereign contagion could spread to banking systems in Portugal, Spain, Italy, Ireland and the United Kingdom, Moody's Investors Service warned on Thursday.

"As shown by the recent downgrade of Greek banks as a result of sovereign weakness, the potential contagion of sovereign risks to banking systems could spread to other countries such as Portugal, Spain, Italy as well as Ireland and the U.K.," the agency said in a report.

"Overall, Moody's notes that each of these countries' banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them."

Despite facing a fundamentally different situation compared with Greece, Portugal is now under heightened investor scrutiny, Moody's said, that led to this week's review for possible downgrade on the ratings of all Portuguese banks. "A key factor determining whether contagion risk continues in this case will be the market's view of the likely success or otherwise of the recently agreed IMF and European Union support package for Greece," the agency noted.

The Italian banking system has been relatively robust so far, the agency said, adding that "the major risk to its banking system could also be challenged by contagion risk should the market pressures on the sovereign increase".

The contagion could also spread to banking systems in Spain, Ireland and the U.K. where sovereign creditworthiness has been impacted by developments within the banking system, Moody's said. The agency pointed out that banking systems in Spain and Ireland and to a lesser extent the U.K. have weakened from within largely due to excessive loan growth.

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