September 23, 2020

Moody’s Downgrades Top French Banks

Moody’s cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each had had recently in raising funds on the open market.

The ratings agency said the banks could face further losses on their holdings of Greek and Italian government bonds should the crisis deepen.

Just a day earlier, Europe’s main banking regulator said that all French banks had passed a test designed to see whether financial institutions had enough capital to weather unexpected shocks.

And on Friday, Goldman Sachs upgraded its recommendation for holding shares of European banks to neutral from underweight. It said a decision Thursday by the European Central Bank to lend troubled banks dollars for longer periods under eased terms would help the banks weather the effects of the crisis and an economic downturn.

But the Moody’s assessment includes more dire assumptions about the future of the euro than the European Banking Authority used. Moody’s also repeated a warning that Greece and several other countries could default on their debts and exit the euro zone if politicians failed to find a solution to their problems.

If Société Générale, BNP Paribas and Crédit Agricole continue to have trouble getting funding, Moody’s said, the French government will probably step in to provide them with financial support, raising the specter of at least a partial nationalization of the biggest French banks.

The French government has a long history of stepping in to support its banks, considering them integral to the economy. French officials have said they are ready to backstop the banks if the markets force their hand, but they insist the banks are sound.

The downgrades came as European leaders took their latest step Friday to keep the euro monetary union from breaking apart. All 17 members of the euro zone agreed to sign a treaty that would require them to enforce stricter fiscal and financial discipline in future budgets.

The leaders also agreed to provide €200 billion, or $266 billion, to the International Monetary Fund and to make changes to Europe’s own bailout funds to help keep the crisis from engulfing Italy and Spain.

Many banks in Europe have had trouble getting funding in recent months, and have had to turn to their national central banks and the E.C.B. instead.

Société Générale, BNP and Crédit Agricole had “materially” increased their borrowing from the French central bank in September, Moody’s said, adding that it was “unlikely that markets will return to normalcy soon.”

Standard Poor’s warned in the past week that it could cut the credit ratings of 15 countries in the euro zone — including France — by two notches, as the bill from the crisis grows and the European economy risks tipping into a recession.

If such a downgrade were to happen, all banks in those countries would have even more funding problems.

Société Générale and BNP recently cut the amount of Italian debt they hold. Each also recently took losses on their investments in Greek bonds.

But Société Générale and Crédit Agricole remain exposed to Greece through subsidiaries there that could pose fresh problems if Greece were to default or leave the euro, Moody’s said.

BNP is exposed to Italy further through a retail banking outlet.

To maintain a sizable capital cushion so as to absorb any fresh losses the crisis might inflict, each bank has announced plans to sell assets. But with investor appetite dampened by the crisis, Moody’s warned that the banks could have a hard time finding buyers.

Société Générale said it was “confident” it could reach its capital goals and “surprised” by the Moody’s decision to downgrade it.

Société Générale is one of a handful of European banks that have been the subject of rumors of financial difficulty. The bank has vigorously denied that, and last summer called on the French government to investigate what it said were attacks against it by short-sellers, or investors betting against its stock.

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