Santander UK credit rating cut by Moody's amid Spanish banking crisis

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Spain’s banking crisis reached Britain’s high streets last night when the credit rating of Santander UK was cut.

In a sweeping reassessment, ratings agency Moody’s announced in Madrid that it is downgrading 16 Spanish banks because it could not be sure of the ability of the country’s government to provide the necessary support.

Santander UK was among the banks highlighted after the ratings agency took aim at its parent Banco Santander, whose shares fell 1 per cent in Madrid this morning.

The Spanish banking crisis has hit the British high street, with the news that Santander has had its credit rating cut

Santander is one of the biggest players in UK retail banking, having taken over the former Abbey National, Alliance & Leicester, Bradford & Bingley and most recently the English branches of the Royal Bank of Scotland.

The new lower A2 credit rating is certain to be a cause of anxiety to Santander UK’s millions of British customers.

Nevertheless, they can be confident that their deposits up to £85,000 are guaranteed by the British government should there be a loss of confidence.

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In the past few days it was revealed that several local authorities in Britain, including Kent County Council and Westminster, had temporarily decided to move their short-term deposits from Santander UK until the pressure on the Spanish banking system had eased.

Although it is a wholly owned subsidiary of Madrid-based Banco-Santander, the UK offshoot is regulated by the Financial Services Authority and would have access to Bank of England emergency funds in the unlikely case that it is threatened.

Senior UK regulators noted last night that Santander UK had more share capital and a better cushion of cash than the Spanish bank and it is hermetically sealed from the problems of the Spanish banking system. 

Santander UK, with its headquarters in London (pictured here) is one of the biggest players in the UK retail banking sector

Bank shares fell across Europe as confidence in the sector was weakened and the spectre of panic withdrawals was raised. Falling bank shares in London took the FTSE 100 index in London hit a new six-month low, trading 76 points or 1.4 per cent down at 5,262.

The UK's big listed High Street banks have greater exposure to eurozone sovereign debt than Santander UK and their shares are down nearly 30 per cent over the last three months. Lloyds Banking Group  is 1 per cent down.

Last night’s downgrades followed a hectic day on Madrid’s financial markets which saw the shares in Bankia, Spain’s fourth-largest bank, plunge by more than a quarter following reports that savers had withdrawn more than £1billion in recent days.

Its shares were temporarily suspended as investors panicked over reports of an accelerating bank run.

Deputy economic minister Fernando Jimenez Latorre was forced to deny a flight of deposits at Bankia, which was part-nationalised earlier this month.

But prominent Spanish economist Dr Pedro Schwartz said senior officials at the bank had told him savers were withdrawing ‘large deposits’.

He said £400million had been taken out of the bank on Tuesday, which was a public holiday, with a further £800million being withdrawn yesterday.

Yesterday, the Spanish government’s borrowing costs rose sharply again  and are now dangerously close to the 7 per cent figure that is considered unsustainable.

Moody’s said it was acting because of ‘adverse operating conditions’ in the euro area and Spain in particular. It said the country was plagued by ‘renewed recession, the ongoing real estate crisis and persistent high levels of unemployment’.

Several local authorities in the UK have withdrawn deposits from the bank until the crisis blows over

The downgrade is certain to cause new tensions across the world’s financial markets when then re-open today.

The warnings came after a fourth grim day on European stock markets, with the FTSE 100 index of leading UK shares down by  67 points.

Meanwhile, there were warnings that all eurozone countries could be downgraded – and face higher borrowing costs – if Greek voters elect an anti-austerity government in fresh elections next month.

Ratings agency Fitch downgraded  debt-crippled Greece deeper into junk territory, warning it could be close to a ‘widespread default’ on both government and private-sector loans, and leaving the euro.

Bank officials have revealed withdrawals from Greek banks are running at £650million a day in the wake of this month’s inconclusive elections.

Greek president Karolos Papoulias has warned of the risk of ‘panic’ if the situation escalates.

The National Bank of Greece was forced to deny reports yesterday that it was planning to limit cashpoint withdrawals to just £40 a day.

Analyst Capital Economics warned: ‘Concerns are growing that bank runs could soon become a regular feature in other troubled countries in the region deemed at risk of following Greece’s lead.’