Moody's Cuts Rating of SocGen, Credit Agricole
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By INTI LANDAURO, GERALDINE AMIEL and TERENCE ROTH
PARIS—The announcement by Moody's Investors Service Wednesday that it has downgraded the credit rating of two of France's largest banks revived concerns that Europe's lingering sovereign-debt crisis threatens the region's top financial institutions.
In a widely anticipated decision, Moody's lowered the long-term debt rating of Société GénéraleSA and Crédit Agricole SA, citing funding and liquidity problems for SocGen and Greek exposure for Crédit Agricole. The ratings firm kept BNP Paribas unchanged, though maintained it under review.
Moody's cut Société Générale to Aa3 from Aa2 and downgraded Crédit Agricole to Aa2 from Aa1, while BNP Paribas stayed at Aa2.
Nick Hill, Moody's senior analyst for French banks, said its decision to downgrade the banks included the assumption of debt restructuring that would cost investors up to 60% on Greek sovereign debt, 50% on Portuguese and Irish debts, 10% on Spanish debt and 7% on Italy's debt.
Mr. Hill said the rating review also takes into account the likelihood of French government intervention to support French banks, but he declined to estimate the probability of such an intervention.
In the case of SocGen, Moody's concluded that its "capital base currently provides an adequate cushion to support its Greek, Portuguese and Irish exposures," though the bank's dependency on wholesale funding is a problem. The outlook on Société Générale's rating is negative.
Bank of France Governor Christian Noyer said on French radio RTL early Wednesday that French banks already have enough capital for them to face the debt crisis in Europe. But he also said they should keep building capital equity to remain among the Continent's top banks.
French bank shares have plummeted in recent weeks, with SocGen losing more than 50% since early August.
Minutes after the downgrade, Crédit Agricole announced it will set up a general guarantee to its Crédit Agricole Corporate and Investment Bank unit or its affiliation. The mechanism will be ready in December, Crédit Agricole said.
BNP Paribas said Wednesday it has launched a plan to refocus its business on strategic activities, slashing its dollar-liquidity needs and reducing assets in order to comply with the tougher Basel III capital-adequacy rules by 2013.
BNP Paribas also said potential losses from its €4 billion ($5.47 billion) Greek sovereign-debt portfolio are manageable. The bank, which has taken a 21% hit on its bonds so far, said that even if losses were to rise to 55% its impairments would be a pretax €1.7 billion.
Moody's said BNP Paribas's profitability and capital base currently provide an adequate cushion to support its Greek, Portuguese and Irish exposure. The ratings firm, however, kept BNP Paribas under review for a possible downgrade not to exceed one notch. Such a review would happen within the next three months.
Although widely expected after Moody's put French banks on credit watch in June, confirmation of the downgrades sent new concerns rippling through European financial markets.
The euro fell after the news, giving up some of its overnight gains and settling to $1.3632 from a high of $1.3706.
Société Générale shares opened 6.4% lower before shaving its loss to 1.7%. Crédit Agricole initially fell but recovered to post a 2.4% rise. BNP Paribas shares were 2.5% lower after the opening.
The cost of insuring European corporate and government debt against default rose early Wednesday after the French bank downgrades reminded investors of possible contagion in the financial system.
"Next up for Moody's will be Italy," said Gary Jenkins, credit-rating strategist at Evolution Securities. "We would expect a downgrade by the end of this week although, again, note that [Standard and Poor's Corp.] is already two notches lower than Moody's."
German Chancellor Angela Merkel calmed markets Tuesday by playing down recent talk of an inevitable default by the Greek government, an event that many investors fear could put similar pressure on other countries along Europe's periphery.
Conflicting statements by German politicians about Greece have added to market fears that Greece will default on its debt and might be forced out of the euro.
Ms. Merkel will hold a teleconference later Wednesday with Greek Prime Minister George Papandreou and French President Nicolas Sarkozy on the Greek crisis. The inability of Athens to plug budget gaps during a recession is seen as the biggest threat to the future of the euro.
Write to Inti Landauro at inti.landauro@dowjones.com, Geraldine Amiel atgeraldine.amiel@dowjones.com and Terence Roth at terence.roth@dowjones.com
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