Wednesday, 4 February 2009

Kazakh Banks Face S&P Downgrade as Problems in Financial System Worsen

The nationalisation of banks is becoming more problematic than originally expected. While in some countries the problem is moral hazard (saving weak lenders, rewarding bad management and paying them bonuses,) in others is the real risk of a systemic failure. While many say ''let them fail and save the real economy´´ (I include myself in that group,) for some other countries the policy connundrum is quite difficult.

Standard and Poor's may cut the long-term counterparty credit ratings on Kazakhstan-based BTA Bank, its two subsidiaries Temirbank and BTA Ipoteka Mortgage Co., and on Alliance Bank. These rating actions follow the Kazakh government's decision to buy 78 percent stake in BTA through an injection of $2.1 billion and a 76% stake in Alliance by buying shares from existing shareholders.

''We believe that, given the status of BTA and Alliance as systemically important banks, further support would be forthcoming if needed to further stabilize their financial condition,´´ according to S&P. "We remain concerned about the continuing downward pressure on the banks' stand-alone creditworthiness from asset quality deterioration, which is depleting their capitalization, as well as continuous funding and liquidity challenges,´´ said credit analyst Annette Ess in the report. The Kazakh government expects its ownership of the banks to be temporary, but at this stage, the strategy and timing of the government's exit, which might be protracted, is unclear.

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