Three of France’s top tier banks had their ratings cut by Moody’s today due to their large exposure to euro zone sovereign debt. The ratings agency does not see any reduction in the banks balance sheets due to the difficult markets situation.
The downgrades follow a Moody’s review launched in June. The ratings agency extended the review in September, when it also downgraded SocGen and Credit Agricole, but spared BNP Paribas.
Moody’s downgraded BNP Paribas SA and Crédit Agricole SA’s long-term debt ratings to double-A3 and Société Générale SA to single-A1. All three have negative outlooks.
All of the downgraded banks remain dependent on wholesale money markets, and the problem is that in recent months these markets are getting tighter, making funding more expensive and harder to access. Namely Italian and Spanish debt yields have reached euro-record highs a couple of weeks ago.
The three main listed banks are all in the midst of restructuring plans to reduce their funding needs and lower risk, with a view to complying with more stringent rules on the amount of capital they set aside against possible losses.
Moody’s however sees risk in the ability of these banks to lift their capital levels and are concerned about the dangers of a credit crunch in the European banking system.
But BNP Paribas, SocGen and Crédit Agricole have all said repeatedly that they can reach the new capital levels without turning to investors or the government for cash.
In response, Moody’s said that implementing these plans could be tough. “Given the broader deleveraging efforts being undertaken by banks in France and elsewhere, there is an increasing risk that a lack of market appetite for assets might result in a less-than-expected balance-sheet reduction, or sales at depressed prices,” it said. “This could mean that the deleveraging plan ultimately falls short of its objectives and/or does not succeed in improving capitalisation due to higher-than-anticipated losses.”