Moody's Downgrades French Banks

Moody's Investors Service Friday downgraded France's three main listed banks because of deteriorating funding conditions and their continuing exposure to sovereign debt, and warned that the banks' plans to reduce their balance sheets could be hampered by difficult markets.

It cut 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.

The move highlights the continuing difficulties faced by French banks because of the European sovereign debt crisis. All of the downgraded banks remain dependent on wholesale money markets that have become constrained since the summer, making funding more expensive and harder to access.

French banks were particularly hard hit by the withdrawal of U.S. money market funds from Europe on mounting fears of a sovereign debt default. Since then they have sought alternative sources for dollar funding.

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.

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.

However, 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."

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.

read more: Olympus Wealth Management