The EU's debt crisis could spill over into banks in Portugal, Spain, Italy, Ireland and the UK, according to a report from the agency published yesterday.
"Each of the banking systems examined in this report faces different challenges, but the contagion risk could dilute these differences and impose very real, common threats on all of them," reads the report.
Banks in Greece, Portugal and Italy have a substantial amount of troubled government debt in their portfolios, the credit rating agency stressed.
Meanwhile, If Italy's debt were to come under more pressure, its relatively stable banking landscape could be in danger.
And Spain, Ireland and the UK are facing homemade problems like excessive credit lines with little prospect of repayment, according to the agency's assessment.
These banks could be to blame for contagion to government coffers, reversing the Greek example of state deficits threatening banks.
The agency paints a particularly bleak picture of the UK, which yesterday held a general election.
"The UK government has entered the crisis with higher debt levels, and the economy has been more harshly impacted due to the much greater reliance on the financial sector. Any reduction of this excess liquidity or increase in interest rates could destabilise this fragile balance, especially given that the high leverage of households provides little cushion against such a scenario," reads the report.
On Wednesday markets around the world promptly responded to hints of contagion, even after Greece's €110bn rescue package. As a result, the euro fell to a 14-month low against the dollar to $1.27.
The debt crisis in Greece has forced the Greek government into making severe tax hikes and spending cuts. This led to riots on the streets of Athens, where three bank workers were killed by a petrol bomb on Wednesday (EurActiv 03/05/10).
Meanwhile, credit rating agencies have come under severe criticism in the EU for after Standard & Poor's downgraded Greek and Portuguese debt, spreading widespread gloom across EU markets (EurActiv 29/04/10).
The European Commission has told the agencies to watch their step when judging a country's financial health, saying it would probe their work and could even set up a central agency to take over their job (EurActiv 05/05/10).
