Credit rating agency Fitch sacked

Credit rating agency Fitch sacked by Portuguese Banco Espírito Santo

• Fitch criticised for downgrade of Portugal's BES
• Euro hit by Portuguese and Irish worries

• Jill Treanor
• guardian.co.uk, Tuesday 9 November 2010 19.08 GMT



European Central Bank, which Fitch says will be an increasing source of funding for banks such as Banco Espírito Santo. Photograph: David Crossland/Alamy

The credit-rating agency Fitch was fired by one of Portugal's biggest banks today in the latest assault on agencies during Europe's sovereign debt crisis.

Banco Espírito Santo (BES) was downgraded from A to BBB+ but insisted that the action by Fitch did "not reflect the financial soundness of the bank".

It was the second downgrade of BES since July, prompting the bank to argue that there was "no valid justification for a three-notches downgrade in less than four months". "Thus the board of directors decided to terminate the contract with Fitch Ratings as a result of these rating actions," the bank said.

The agency also cut the ratings of three other Portuguese banks amid continuing concerns about the risks they faced in funding themselves on the markets and their reliance on funds provided by the European Central Bank (ECB).

The concerns expressed by BES follow fierce criticism of agencies during the crisis over debt-laden countries in the eurozone. A downgrade raises borrowing costs.

An Irish government agency attacked Fitch's rival Standard & Poors' for downgrading the country's debt in August, saying the one-notch cut to "AA-" was based on a "flawed" analysis. In June, Olli Rehn, the EU's economic commissioner, described Moody's decision to downgrade Greece as "surprising and highly unfortunate". The Greek government said it did not "reflect in any way Greece's progress over the past months".

But criticism of agencies can be traced back further than the eurozone crisis to the credit crunch, which exposed some financial instruments that were awarded top-notch ratings as being worth little more than "junk". This recently prompted the International Monetary Fund to urge agencies to lift the "cloud of suspicion" that has hung over them since the sub-prime mortgage crisis three years ago.

Fitch today stood by its decision to downgrade BES and the other Portuguese banks. "The downgrades reflect increased funding and liquidity risks due to their high reliance on short- and medium-term wholesale funding sources, with increased recourse to ECB funding, in the context of continued difficulties to access the capital markets, and deterioration in domestic performance and asset quality".

Since the Greek crisis in April, many European banks have increased their reliance on ECB funding and conventional dealings between banks in the money markets in countries such as Portugal have virtually dried up. Fitch noted that while the reliance of Portuguese banks on ECB funding had fallen by the end of September, it still remained "remain well above pre-financial crisis levels, highlighting continued funding and liquidity constraints".

But BES argued that it cut its use of ECB facilities from €6bn (£5.2bn) in June to €4.3bn in September and had a very strong capital position.

Anxiety about the health of the Portuguese and Irish economies hit the euro today, while Ireland's borrowing costs were again sky-high. The premium that investors demand to hold Irish bonds over German government debt – regarded as the safest in the eurozone – rose by four basis points to another high of 574 basis points, or 5.74%, on Tuesday before falling back to 570 basis points.