Agustino Fontevecchia
Agustino Fontevecchia, Forbes Staff
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9/14/2011 @ 12:09PM |435 views
Moody's Downgrade: SocGen, Credit Agricole's Liquidity Problems Larger Than Greece
Stocks Mixed After Moody's Downgrades SocGen And Geithner Rejects Lehman-Moment
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After weeks in the eye of the storm, Societe General and Credit Agricole saw their credit ratings axed one notch by Moody’s on concerns over sizeable exposures to the Greek economy and “potentially persistent fragility in the bank financing markets.”
The downgrades both confirms weakness in the French banking sector, recently targeted by investors, and once again attested to the power of credit rating agencies, shaking markets and sending shares in both banks well in the red through most of the day, despite late rallies.
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It comes as no surprise that SocGen was downgraded on Wednesday. The bank had made repeated headlines after its share prices came under heavy downward pressure on fears that it might go broke, forcing management to come out and defend the bank and even pledge to free up about €4 billion ($5.5 billion) in assets to build up its defenses.
Moody’s confirmed the bank looked week, downgrading its debt and deposit rating by one notch to Aa3 from Aa2, while keeping its Bank Financial Strength Rating (BFSR) at C+ (equivalent to A2) but putting both of them on a negative outlook.
Credit Agricole, much less talked about in the financial media, was also under fire recently. Moody’s confirmed single-notch downgrades for both its debt and deposits (to Aa2 from Aa1) and its BFSR (to C from C+). As with SocGen, Credit Agricole was put on a negative outlook meaning more downgrades could come.
SocGen’s exposure to Greece, Portugal, Ireland, Spain, and Italy is sizeable but manageable, Moody’s noted. SocGen’s sovereign exposure to Greece remains at €1.9 billion ($2.6 billion), while its private sector exposure is €4.3 billion ($5.9 billion) in poor quality loans. Cumulative sovereign exposure to the remaining PIIGS totals €8.3 billion ($11.4 billion) while private sector exposure reaches €3.7 billion ($5.1 billion).
In the case of Credit Agricole, residual net exposure to Greek sovereigns stands at €891 million ($1.2 billion), less than 2% of its core tier 1 capital. Sovereign exposure to the other PIIGS reaches €11.5 billion ($15.8 billion), mainly concentrated in Italy. Private exposure to Greece, concentrated in its local subsidiary Emporiki Bank of Greece, reaches €24 billion ($33 billion). Private sector exposure to the remaining peripherals totals €5.7 billion ($7.8 billion).
Under adverse scenarios with large haircuts, both banks would take a big hit but would be able to survive, absorbing the losses, Moody’s notes.
The main problem, though, is funding. In both cases Moody’s sites vulnerability due to excess reliance short-term wholesale funding. As money market funds in the U.S. have become increasingly risk averse, European banks have lost a main source of U.S. dollar funding. While both SocGen and Credit Agricole have full access to Eurosystem central bank liquidity in major currencies, a deterioration in market sentiment makes them particularly vulnerable given their exposure to short-term wholesale funding. (Read Euro Banks Stocking Up On Dollars To Avoid Liquidity Squeeze).
The downgrades sent shares in both banks well into the red through most of the day in Paris, but a late session rally reversed most of those losses. As French central banker Christian Noyer came out in defense of his country’s banks, shares in SocGen closed the day down 2.1% after having traded well below 7%, while shares in Credit Agricole actually jumped back up into positive terrain, closing up 1.2%.
