PARIS 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 (BNPP.PA) and Credit Agricole (CAGR.PA) by one notch to Aa3, concluding reviews that began in June and were continued in September. Societe Generale's (SOGN.PA) 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 said.
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 health.
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, 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 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 December 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 debt crisis.
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 (DBKGn.DE) and Spain's BBVA (BBVA.MC).
(Additoinal reporting by Lionel Laurent, James Regan, Adam Parry and Juliette Rouillon; Editing by David Cowell, Mike Nesbit and Will Waterman)
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