Some sort of move by Moody's had been widely expected this week since the agency had put them and rival BNP Paribas on review for downgrade in mid-June.
While cutting its rating on Societe Generale's long-term debt rating by one notch to Aa3 and Credit Agricole's by the same amount to Aa1, Moody's warned that both could have their ratings downgraded by a further notch as it assesses "the implications of the persistent fragility in the bank financing markets." BNP's rating also remains under review.
The downgrades come as Europe scrambles to deal with the Greek debt crisis amid mounting fears that the debt-laden nation may have to default. That would leave some banks holding a lot of debt that might never be repaid, and investors are wondering if the banks have enough of a cushion to absorb those losses.
Because of those fears, some European banks have been having trouble securing the loans they need to fund their day-to-day operations; U.S. money-market funds have seemingly been particularly reluctant, and one European bank was forced to pay higher than market rates recently to get dollar funding from the European Central Bank.
Moody's assessment on Wednesday explored how the banks would weather a significant loss on their Greek debt, and the new review will now look at how much they've been affected by the difficulty to raise money on capital markets.
"Our concern now is more the financing markets of banks. Funding conditions have become more difficult and the risk is that persists and that becomes progressively more negative the longer it persists," said Nicholas Hill, an analyst at Moody's.
The banks, Societe Generale and BNP Paribas, in particular, have denied that the funding difficulties have put them in any real danger, saying that they still have plenty of access to loans.
Moody's maintained its Aa2 rating on BNP Paribas because its profits and capital base "provide an adequate cushion to support its Greek, Portuguese and Irish exposure."
Following the downgrade, Societe Generale said Moody's analysis shows that the bank's exposure to Greece "to be modest and manageable."More...