Moody's Warning for Western European Banks Boosts Fear Sentiment

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Risk aversion is wreaking havoc in financial markets Tuesday morning with U.S. equity futures breaking through key support levels and the U.S. dollar rising higher across the board.

Ratings agency Moody's said that a recession in emerging Europe will be more severe than in other countries and will put financial pressure on Western European banks. Austria, Italy, France, Belgium, Germany and Sweden are the countries most at risk, and account for 84% of the Western European bank loans for eastern investments.

"A widespread deterioration in the economic health of core markets in Eastern Europe is exerting negative rating pressure on subsidiaries and eventually may also lead to a weakening of the parent bank's ratings," Moody's said in its report.

The selloff started in the Asian session, following the release of the Moody's report, then quickly spread into the European and North American trading sessions.

S&P futures dropped below the 800 level Tuesday morning, which has been a very strong support level for equity markets. Some strategists have said that a break through 800 could lead to a retest of the November low of 737.

The U.S. dollar continues to make broad gains across the board. The U.S. dollar index is trading at two-month highs and hit a session high of 87.729. At the same time, the weaker equity markets are also helping drag U.S. Treasury yields lower, with 10-year yields down 17 basis points to 2.714% and two-year yields down 8 basis points to 0.8750.

With credit problems continuing to grow in Europe, bank stocks are leading equities lower in trading on Tuesday. Austria's Erste Group Bank, KBC in Belgium and France's Société Générale are some of the top losers in European markets.

Moody's said there are still some benefits for banks that provide funding for emerging markets, saying parent banks that abandon one country may cause a domino effect and destroy clients' trust in another country.

By Neils Christensen and edited by Stephen Huebl
©CEP News Ltd. 2009