Downgrade Spells Trouble for French Banks…and Euro Crisis

09/14/2011 3:06 pm EST


Jim Jubak

Founder and Editor,

Today’s credit-rating downgrade of French banks Credit Agricole and Société Générale by Moody’s Investors Service tells you, in case you had any doubts, that the Euro debt crisis is now a banking crisis. And that the crisis has moved from the periphery of the Eurozone (Greece) to the core (France).

Moody’s cut the long-term credit rating of France’s second- and third-largest banks by one grade, to Aa2 and Aa3, respectively. Moody’s kept its rating for BNP Paribas, the biggest French bank, at Aa2.

The BNP Paribas and Credit Agricole ratings are under review. Société Générale got a “negative outlook” opinion.

Moody’s cited the big exposures of these two French banks to the Greek banking system and their large exposure to Greek government and private-sector debt in its downgrade. Credit Agricole owns an unprofitable Greek subsidiary, Emporiki Bank of Greece, while Société Générale has a controlling stake in Geniki Bank.

The downgrade brings Moody’s ratings in line with those of Fitch Ratings and Standard & Poor’s.

In a separate announcement, the European Central Bank said it will lend dollars tomorrow to two Eurozone banks that are having trouble borrowing dollars in the currency markets. The ECB has so far refused to identify the two banks.

Because of the increasing unwillingness of US money-market funds and US banks to lend to European banks, those banks have found it harder and more expensive to borrow in dollars to cover their dollar-denominated lending activities.

It’s tempting to put today’s downgrade of two big French banks together with the central bank’s announcement, and conclude that the dollar lending will go to these big French banks. But there are plenty of other candidates that are finding it even harder to borrow in dollars.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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