* Cuts BNP, Credit Agricole to Aa3, SocGen to A1
* Downgrades leave banks roughly even with peers
* Shares gain on ECB funding move
By Leila Abboud and Christian Plumb
PARIS, Dec 9 Rating agency Moody's has
downgraded the debt of France's three largest banks, citing
deteriorating liquidity, a day after the European Central Bank
offered banks funding for three years for the first time ever.
The downgrade comes at a sensitive time for the banks, which
have seen their shares pummelled because of their large balance
sheets and reliance on short-term dollar funding as the euro
zone debt crisis spread.
Moody's cut its ratings on the long-term debt of BNP Paribas
and Credit Agricole by one notch to Aa3,
concluding reviews that began in June and were continued in
September. Societe Generale's long-term debt was cut
by one notch to A1.
The downgrades were driven by the increasing difficulties
the banks were having in raising funding, as well as worries
that the banks' plans to sell assets could be undercut by
competition from other lenders doing the same thing.
Despite the banks' moves to sell off much of their sovereign
bond holdings in recent months, Moody's said their exposure to
economies including Italy's also remained a problem.
Socgen said in a statement it was surprised by the decision
and challenged the ratings agency's reasoning, adding that its
third-quarter results had shown its "capacity to adjust rapidly
its management of short and long-term funding needs in the
current unfavourable market environment".
In addition, its exposure to crisis-hit nations such as
Greece, Italy and Spain was "modest and manageable", the bank
BNP Paribas declined to comment, and Credit Agricole could
not immediately be reached for comment.
All three banks' shares bounced back from early losses, with
Credit Agricole up 3.4 percent, BNP up 3.2 percent and Socgen
adding 0.9 percent as investors weighed the downgrades against
steps to boost European banks' liquidity announced by the
European Central Bank on Thursday.
"The ECB's three-year refinancing is good news for the banks
since it reduces the risk of a breakdown in the sector," said
Romain Burnand, co-founder of Moneta Asset Management. "That
offsets the disappointment some investors are feeling about
progress in the European summit talks."
The cost of insuring the risk of default on the French
banks' debt rose, however, with credit default swaps on all
three between 17 and 21 basis points wider.
Another ratings agency, Fitch, said the ECB moves could
boost interbank lending, which has fallen in recent months as
lenders have become anxious about their rivals' financial
French President Nicholas Sarkozy also praised the ECB move
late on Thursday.
"In addition to the second straight cut in interest rates,
the central bank -- and this is the first time in its history to
my knowledge -- has just decided to give unlimited three-year
loans to European banks at a very low rate," he said.
He added that banks borrowing at such low rates would be
more likely to lend to governments which, like Italy, have
struggled with surging borrowing costs in recent weeks.
All three French banks have seen their access to short-term
funding sharply curtailed this year as U.S. money market funds
stopped buying French banks' debt because of fears about their
exposure to euro zone sovereign debt. The sector as a whole has
increasingly traded in line with broader optimism or pessimism
about potential solutions to the regional debt crisis.
Late on Thursday Europe's banking watchdog, the European
Banking Authority (EBA), gave French banks some good news,
saying they needed to find 7.3 billion euros in fresh capital by
mid-2012, down from a previous estimate of 8.8 billion euros.
Moody's said its ratings did take into account the fact that
all three French banks were likely to benefit from state support
if the crisis deepened.
BNP has $47 billion, or 23 percent, of outstanding bonds
coming due next year, while SocGen has $27.5 billion, or 13
percent of its outstanding bonds maturing, and Credit Agricole
has $31.4 billion, or 16.5 percent, expiring, according to
Thomson Reuters data.
BNP has said it has already raised 8 billion euros ($10.6
billion) towards its 2012 medium-to-long-term funding
requirements and still needs to raise another 20 billion.
BNP Chairman Baudouin Prot reiterated in a newspaper
interview that France's largest bank was managing its way
through the funding crunch.
"We are finding the means without having to turn to the ECB
or the Fed," he told Frankfurter Allgemeine Zeitung.
SocGen said last month that its medium/short-term issuance
for 2012 had been set at between 10 billion and 15 billion
euros, roughly half its 2011 bond sale total.
On Wednesday rating agency Standard & Poor's placed its
ratings on BNP, Credit Agricole, and Societe Generale on "credit
watch with negative implications" on Dec. 7.
S&P had earlier put a series of European states, including
France, on watch negative over fears that political leaders were
not moving decisively enough to curb the deepening sovereign
BNP and SocGen had been spared a previous round of ratings
cuts by S&P on the world's largest banks in late November.
The Moody's one-notch downgrade still leaves the top French
banks' ratings on roughly the same level as European peers. Both
BNP and Credit Agricole's long-term debt and deposit ratings are
now at Aa3, the same as Deutsche Bank and Spain's