After months of trader speculation, credit agency Moody’s has cut its rating on two of France’s biggest banks, citing Europe’s waning ability to support its credit markets.
Societe Generale (SCGLY, quote) and Credit Agricole (CRARY, quote) are both suffering today on news that Moody’s has cut their credit ratings one notch apiece.
SocGen, seen as the weaker of the two institutions, is down a full 5%, while Credit Agricole shed 1% in New York trading. The stocks have plunged a respective 37% and 31% over the last month:
Moody’s announced in mid-June that it was putting both banks on negative review. Since most of the agency’s credit reviews are finished within 90 days, traders were already uneasy about the outcome.
According to today’s release from Moody’s, both banks are still being monitored for further deterioration, and an additional downgrade could be down the road.
Moody’s currently rates Societe Generale as Aa3 and Credit Agricole one notch higher at Aa2.
France’s AAA sovereign credit rating is not in question. But while its biggest bank, BNP Paribas (BNPQY, quote) wasn’t downgraded, it is still on review.
Most ominously, Moody’s says that it would actually rate all three banks two notches lower if it were not for the sense that France and the European Union consider them “too big to fail.”
U.S. Treasury Secretary Timothy Geithner today said “there is no chance that the major countries of Europe will allow their institutions to be in danger.”
However, that “systemic” support has eroded over the last three months, especially for Societe Generale, which Moody’s originally believed governments would support much more aggressively.
In a worst-case scenario — which could emerge as early as October, when Greece could run out of cash — the rating agency now thinks Societe Generale may lose up to $2.2 billion or 3.4% of its core capital if its foreign bond holdings implode.
The better-capitalized Credit Agricole may lose $2.1 billion on its own bond portfolio.
Paribas is more of a mystery to Moody’s, but they estimate that that bank could lose a full $6.8 billion — more than its two smaller rivals combined — and 5.6% of its core capital if Europe’s credit markets collapse. BNP Paribas today pledged to sell 70 billion euros (US$96 billion) in assets to shore up its balance sheet.
Moody’s is forecasting maximum losses of 60% for portfolios holding Greek sovereign debt and 50% for Irish and Portuguese bonds.
According to their models, Spain and Italy are unlikely to completely implode, generating losses of 10% and 7%, respectively.
Both the Paris market and the French ETF EWQ (quote) gained ground today. EWQ only has about 3% of its assets in Societe Generale and Credit Agricole shares, and another 5% or so in Paribas stock.
And in any event, a Greek rescue could still happen. As the chief executives of France, Germany and Greece confirmed after a joint conference call this afternoon, “Greece is a central part of the euro zone. Greece will remain a part of the European Union.”