Credit downgrade hits French banks

(Reuters)

Ratings agency Moody's has downgraded three leading French banks, citing the worsening eurozone debt crisis.

After a review, Moody's knocked down the overall strength rating and debt ratings of BNP Paribas, Societe Generale and Credit Agricole.

The agency noted in three statements that the downgrades were prompted by deteriorating liquidity and funding conditions and "the fragile operating environment for European banks".

It took action today, the day after regulators said European banks have to raise about 115 billion euro (£98 billion) - more than expected - to meet a new standard meant to inoculate the lenders against market turmoil.

European banks have billions of euros of risky government bonds on their books, and investors are increasingly concerned the lenders won't be able weather all of the expected losses on those loans.

Moody's also noted that the three French banks carry a substantial amount of risky debt on their books.

Credit Agricole even owns a Greek subsidiary. Greek banks, which own much of their government's debt, were hit particularly hard by an agreement to slash the value of bonds.

Societe Generale also carries a lot of Greek bonds as well as Italian ones, while BNP has significant exposure to Italy.

While all three of the banks - some of the largest in Europe - have begun to get rid of that debt, Moody's said that exposes them to significant losses.

"Given that many other banks in Europe are engaged in similar programmes, there is a mounting risk that the resulting asset sales could be detrimental for capital," the agency said.

BNP's overall strength rating fell two notches to C, Societe Generale's moved down the same amount to C-, and Credit Agricole dropped one notch to C-.

C ratings fall in the middle of the Moody's scale, which goes from A to E.

BNP and Credit Agricole's long-term debt ratings were both reduced to Aa3 - which means they remain high quality. Societe Generale's is now A1, a notch below the others.