As reported yesterday, adding insult to injury to a bank that just hours earlier admitted that in addition to rigging everything else it has also been caught engaging in “stock fraud” at the same time as a new mortgage probe was launched against it, Deutsche Bank’s senior debt rating was downgraded by Moody’s to Baa2, just two notches above junk. For the bank with the tens of trillions in derivatives, being seen as an increasingly more distressed counterparty was not good news and explains why the CEO took the unexpected step of having to defend his firm following the downgrade.

As Bloomberg reports, DB’s CEO John Cryan said he was not happy with the Moody’s decision, his bank has never had more capital and could easily repay its debt many times over.:

We are very disappointed,” Cryan said in an interview on the sidelines of the Institute of International Finance’s conference in Madrid. “We have enough capital to repay all of our debt four-times over.”

It is unclear if under debt he also included the bank’s gross notional derivative liabilities which are several tens of trillions worth.

As we reported last night, Moody’s said that Deutsche faces mounting challenges in carrying out its turnaround, and cut the bank’s senior unsecured debt metric one level to Baa2, two grades above junk. The firm’s long-term deposit rating fell to A3 from A2.

The reason why DB has been singled out is because Cryan’s planned overhaul of the bank, laid out in October, has run into an industrywide slump in trading and investment banking, as well as a continued decline in interest rates in Europe and Asia, which is squeezing margins, but most troubling is the bank’s ongoing disclosures of legal non-compliance and outright fraud, leading to billions in settlements, legal fees and other increasingly more recurring charges. Net income fell 61% in the first quarter, leaving the company at risk of a second straight annual loss this year as it tries to resolve legal cases.

Moody’s tried to be diplomatic about its unexpected puke on what may be the world’s most important – and troubled – bank: “The plan they’re trying to execute is a good plan for the bondholder in the long run, but they face some pretty challenging headwinds when you look at the current operating environment,” Peter Nerby, a senior vice president at Moody’s, said in a phone interview. “They’re working on it, but it’s tougher than it was.”

However, one could read between the lines. Meanwhile, Deustche doth protested some more: “All key ratings remain investment grade,” Deutsche Bank Chief Financial Officer Marcus Schenck said in a separate statement on Monday. “And they remain in ‘A’ territory in our counterparty risk assessment and long-term deposit rating, which are most important for our clients.”

For now the market is buying it, literally, and the stock was up 1% in early Frankfurt trading.

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