RBS credit rating cut as shares take a hit

07 October 2008 / by Rachael Stiles
Not only is RBS struggling along with the other banks amid falling share prices and an unstable market, but its credit rating has also taken a knock for the first time in almost a decade.

Amid fears regarding its weakening financial outlook, Standard & Poor's cut the Royal Bank of Scotland's credit rating from A+ to AA- yesterday, which could drastically increase the cost of RBS' borrowing in the money markets.

S&P cited falling earnings and more writedown risks on the horizon as reasons for cutting RBS' credit rating, just before the bank's shares plummeted 20 per cent along with other European banks that are losing value as ministers struggle to forge rescue missions.

Nigel Greenwood, S&P credit analyst, said that "A combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions" have afflicted the mortgage lender, leaving it "less well positioned than some of its major global peers".

RBS shares fell more than 35 per cent yesterday, to less than £1, before going back up 20.5 per cent to 146, its lowest closing price for more than 10 years.

In June, the bank was forced to go cap in hand to shareholders for a £12billion cash injection, and has been trying to sell off its parts in an attempt to shore up its balance sheet, such as its £6billion insurance arm which includes Churchill and Direct Line.

RBS is expected to be among those financial institutions currently in talks with the Chancellor Alistair Darling about a potential rescue plan from the Government, which will see it part-nationalise many of the UK's banks.

Some analysts are critical of The Chancellor's dealing with the credit crisis, accusing him of not taking affirmative action to guarantee savings accounts and help bring stability to the money markets, watching the UK economy slip through his fingers while he dithers over the best route to take.

The situation has been heightened by news from the British Chambers of Commerce today that the UK is already in a recession and the economy could face a prolonged downturn without immediate action from the Government and a rate cut from the Bank of England.

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