Reuters/Paris
Rating agency Moody’s has downgraded the debt of France’s three largest banks, citing deteriorating liquidity, a day after the European Central Bank offered banks funding for three years for the first time ever.
The downgrade comes at a sensitive time for the banks, which have seen their shares pummelled because of their large balance sheets and reliance on short-term dollar funding as the eurozone debt crisis spread.
Moody’s cut its ratings on the long-term debt of BNP Paribas and Credit Agricole by one notch to Aa3, concluding reviews that began in June and were continued in September. Societe Generale’s long-term debt was cut by one notch to A1.
The downgrades were driven by the increasing difficulties the banks were having in raising funding, as well as worries that the banks’ plans to sell assets could be undercut by competition from other lenders doing the same thing.
Despite the banks’ moves to sell off much of their sovereign bond holdings in recent months, Moody’s said their exposure to economies including Italy’s also remained a problem.
Socgen said in a statement it was surprised by the decision and challenged the ratings agency’s reasoning, adding that its third-quarter results had shown its “capacity to adjust rapidly its management of short and long-term funding needs in the current unfavourable market environment”.
In addition, its exposure to crisis-hit nations such as Greece, Italy and Spain was “modest and manageable”, the bank said.
BNP Paribas declined to comment, and Credit Agricole could not immediately be reached for comment.
“The ECB’s three-year refinancing is good news for the banks since it reduces the risk of a breakdown in the sector,” said Romain Burnand, co-founder of Moneta Asset Management. “That offsets the disappointment some investors are feeling about progress in the European summit talks.”
The cost of insuring the risk of default on the French banks’ debt rose, however, with credit default swaps on all three between 17 and 21 basis points wider.
Another ratings agency, Fitch, said the ECB moves could boost interbank lending, which has fallen in recent months as lenders have become anxious about their rivals’ financial health.
French President Nicholas Sarkozy also praised the ECB move late on Thursday.
“In addition to the second straight cut in interest rates, the central bank—and this is the first time in its history to my knowledge—has just decided to give unlimited three-year loans to European banks at a very low rate,” he said.
He added that banks borrowing at such low rates would be more likely to lend to governments which, like Italy, have struggled with
surging borrowing costs in recent weeks.
All three French banks have seen their access to short-term funding sharply curtailed this year as US money market funds stopped buying French banks’ debt because of fears about their exposure to eurozone sovereign debt. The sector as a whole has increasingly traded in line with broader optimism or pessimism about potential solutions to the regional debt crisis.
Late on Thursday Europe’s banking watchdog, the European Banking Authority (EBA), gave French banks some good news, saying they needed to find €7.3bn in fresh capital by mid-2012, down from a previous estimate of €8.8bn.
Moody’s said its ratings did take into account the fact that all three French banks were likely to benefit from state support if the crisis deepened.
BNP has $47bn, or 23%, of outstanding bonds coming due next year, while SocGen has $27.5bn, or 13% of its outstanding bonds maturing, and Credit Agricole has $31.4bn, or 16.5%, expiring, according to Thomson Reuters data.
BNP has said it has already raised €8bn ($10.6bn) towards its 2012 medium-to-long-term funding requirements and still needs to raise another 20bn.
BNP chairman Baudouin Prot reiterated in a newspaper interview that France’s largest bank was managing its way through the funding crunch.
“We are finding the means without having to turn to the ECB or the Fed,” he told Frankfurter Allgemeine Zeitung.
German, French slowdown raises risk of Europe recession
German exports fell in October and French industrial output stagnated, adding to signs that the euro region may slide into recession as leaders struggle to solve the sovereign debt crisis.
German exports dropped 3.6% from September, the Federal Statistics office in Wiesbaden said yesterday, almost three times economists’ median forecast for a 1.3% decline. In France, industrial production was flat in October after falling 2.1% a month earlier, more than the initial 1.7% estimate, Paris-based statistics office Insee said.
Slowing growth in the euro area’s two largest economies may tip the 17-nation currency bloc into recession as European governments boost their rescue fund and tighten fiscal rules in the latest attempt to stamp out the debt crisis. The turmoil is hurting global growth by damping European demand for foreign goods. Chinese manufacturing contracted for the first time since 2009 last month, a report showed on Dec. 1.
“Fiscal tightening plus credit tightening and the confidence impact of the sovereign crisis point to recession” in Europe, said Sarah Hewin, senior economist at Standard Chartered Bank in London. “We’re not expecting anything as bad as the 2008-2009 downturn on the assumption the euro area will continue to muddle through.”
The European Central Bank yesterday cut its benchmark interest rate for the second time in as many months, taking it to 1%, as it slashed its 2012 growth forecast to 0.3% from 1.3%.
“These revisions mainly reflect the impact on domestic demand of weaker confidence and worsening financing conditions, stemming from the heightened uncertainty related to the sovereign debt crisis, as well as downward revisions of foreign demand,” ECB President Mario Draghi told reporters in Frankfurt.