Euro Bank Drama Takes A Turn For The Worse As French Banks Brace For Downgrades By Moody’s

CEO Frederic Oudea
Societe Generale CEO, Frederic Oudea

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French banks BNP Paribas, Societe Generale and Credit Agricole are said to be preparing for “imminent” downgrades by Moody’s.According to Reuters, “France’s top banks are bracing themselves for a likely credit rating downgrade from Moody’s, sources close to the situation said on Saturday.”

It’s not unexpected.

Euro banks are known to have so much exposure to the Eurozone debt crisis that if they marked their assets to market, they would be bankrupt. This week Euro banks were crushed by the market. This latest move by Moody’s comes as the world anticipates a credit event in Greece.

Moody’s put the French banks under a three-month review for a possible downgrade on June 15th. Time’s up, and the banks expect a downgrade.

As they should. Currently they’re rated BNP: Aa2, SocGen: Aa2 and Credit Agricole: Aa1. Each of them is assigned high grade creditworthiness though many make arguments that indicate they don’t deserve it.

For example:

IMF chief Christine Lagarde said at Jackson Hole weeks ago that European banks “urgently” needed to be recapitalized. Last week she echoed her statements again before backing down on them a bit, saying that its estimate for the amount of capital losses Euro banks would suffer, 200 billion Euros, was “tentative” and the Fund was “in discussions with our European partners to assess the global methodology” until the final estimates are published in a Fund paper released shortly before its annual meetings in a fortnight, according to the Financial Times.

Josef Ackermann, the CEO of Deutsche Bank, said in a speech last week that if many European banks marked their sovereign assets to market, they would not survive.

The markets last week slammed Euro banks. This is a sign that the environment for European banks is not improving. Next week, it sounds like we’re looking at more of the same.