French banks scramble to prove they're strong enough for debt crisis

Moody's delivered ratings downgrades for Société Générale (SocGen) and Crédit Agricole yesterday, while keeping another French bank – BNP Paribas – on review for a cut as the eurozone debt crisis raged on.

The widely anticipated move by the credit rating agency came against the backdrop of growing fears for the European banking sector as policymakers struggle to find a solution for debt-laden Greece.

French banks have been among the hardest hit in recent weeks, suffering double-digit share-price falls on concerns about their exposure to the Continent's most indebted countries. Markets have also been worried about their ability to tap funding sources, as investors focus on the risks. Overall, the country's banks are exposed to around €13.4bn (£11.7bn) in Greek public-sector debt, nearly €42bn (£36.6bn) in non-bank private-sector debt and around €1.6bn (£1.4bn) in bank debt, according to figures from the Bank for International Settlements.

But the Governor of the Bank of France defended the country's lenders, saying that Moody's' downgrades were "very small".

"French banks have an excellent rating, the same level as other major European banks HSBC, Barclays, Deutsche Bank, Credit Suisse," Christian Noyer, who is responsible for regulating the sector, insisted yesterday. "There's no really bad news on the way, and Moody's says the level of capital of French banks allows them to absorb any potential losses on sovereign debt."

The ratings agency lowered its view of Crédit Agricole's creditworthiness by one notch to account for the lender's "sizeable exposures to the Greek economy". SocGen's rating was also cut by one notch, with Moody's pinning the reassessment of the level of "systemic support of SocGen in the event of distress". The agency said its new assumptions of support for SocGen were in line with those for BNP Paribas and Crédit Agricole, whose shares are down by about 45 per cent since the start of 2011.

SocGen, whose shares are down by nearly 60 per cent since the beginning of the year, said that "it has proven its capacity to successfully manage the current situation and has the appropriate measure to support its funding profile".

Shortly after the cuts were announced, BNP Paribas, which was spared by Moody's but whose ratings remain on review, said it would sell €70bn (£61bn) of assets as it attempts to strengthen its balance sheet and cut funding requirements.

Mr Noyer said that despite the doom and gloom in the markets, the big French banks had booked enough in profits to cover possible losses on Greek debt. "Even if there was a shocking scenario, as the market expects at times, it would represent less than six months of profits," he argued. "That would mean a smaller dividend but no losses."

He also shot back at speculation that the French state may have to step in to support banks, saying such a suggestion "makes no sense".

But in a sign of the stresses building up in the system, the European Central Bank said yesterday that it had lent $575m (£365m) to two unnamed eurozone lenders in what was the first use of dollar-funding facility in more than a month. The interest rates attached to the central-bank funds are higher than those available in the open market, suggesting that the lenders had problems in accessing commercial sources.