Moody's downgrade of the US banking system, following turmoil in Europe's banking sector, is a blow to reputation of banks but is not expected to tip the economy into recession.
That’s because the cost of doing business for these giant financial institutions such as Citigroup, Bank of America, and J.P. Morgan Chase, will go up as result of having their rating lowered. The banks will then either pass along their higher costs — such as the higher interest rates they will have to pay to borrow money — or will have lower profits which will again inhibit their ability to lend.
“The Moody’s downgrade is not a positive for anyone,” says Sung Won Sohn, a professor of finance at California State University, Channel Islands, and a former banker. “The lower ratings means their ability to lend will diminish.”
However, some analysts doubt that the Moody’s action by itself will tilt the economy into a recession.
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