PARIS - Moody's on Wednesday downgraded the credit ratings of French banks Societe Generale and Credit Agricole following a period of huge volatility in the markets as investors fretted about their potential exposure to the debts of Greece.
Some sort of move by Moody's had been widely expected this week -- the agency had put them and rival BNP Paribas on review for downgrade in mid-June.
While cutting its rating on Societe Generale's debt and deposit rating by one notch to Aa3 and Credit Agricole's by the same amount to Aa1, Moody's warned that both could have their ratings downgraded by a further notch as it assesses "the implications of the persistent fragility in the bank financing markets, given the banks' continued reliance on wholesale funding."
Because of fears of the scale of European banks' exposure to Greek and other risky debt, some have been having trouble securing the loans they need to fund their day-to-day operations; U.S. money-market funds have seemingly been particularly reluctant, and one European bank was forced to pay higher than market rates recently to get dollar funding from the European Central Bank.
But the banks, Societe Generale and BNP Paribas, in particular, have denied that the funding difficulties have put them in any real danger, saying that they still have plenty of access to loans.
Though it maintained its Aa2 rating on BNP Paribas because its profits and capital base "provide an adequate cushion to support its Greek, Portuguese and Irish exposure," Moody's said it could suffer a one-notch downgrade too after the assessment.
Following the downgrade, Societe Generale said Moody's analysis shows that the bank's exposure to Greece "to be modest and manageable."
Earlier this week, Societe Generale's chief executive Frederic Oudea said that the bank was prepared for a downgrade and that it would not change its outlook.
Christian Noyer, the governor of the Banque de France, also shrugged off the news.
"For me, it's relatively good news," Noyer told French radio RTL. "First, because it's a very limited downgrade, only on two out of three banks, and especially since Moody's rates them better than the other two agencies (Standard & Poor's and Fitch), so, in reality, it put them at the same level or even slightly higher than the other agencies."
The downgrades come as Europe scrambles to deal with the Greek debt crisis amid mounting fears that the debt-laden nation may have to default. French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to speak Wednesday with Greek Prime Minister George Papandreou to discuss the crisis.
French banks have been in the spotlight in recent days over their potential exposure to Greece. Both Societe Generale and BNP Paribas issued statements seeking to diminish market fears.
Following Moody's statement, shares in Societe Generale were trading 2.4 per cent lower, while BNP Paribas was also pressured even though it wasn't downgraded. Its share price was down 3.9 per cent. Credit Agricole bucked the trend, trading 1.9 per cent higher.
