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French banks downgraded as Europe’s debt crisis deepens – LIVE

Moody’s has cut Société Générale and Credit Agricole’s credit ratings – just hours ahead of crucial talks between Germany, France and Greece

8.48am: We’ve got some more details of the “Crisis? What Crisis?” interview given by Bank of France governor Christian Noyer (in which he told RTL that the downgrade “relatively good news”)

Asked about the nationalisation of a French bank, Noyer said:

“That is something which makes no sense. It is totally surreal. French banks do not need any outside capital to face up to risks.”

Noyer also said that Greece can “stay on the rails” in relation to its debt agreements. “They can do it. That implies huge reforms, but they can do it.”

With Greek two-year government bonds yielding (wait for it) 93% this morning, the markets take a rather different view.

Noyer is trying to draw attention to the elements in the Moody’s releases today which stressed that the banks can meet potential Greek losses.

“Even if there was a shocking scenario, as the market expects at times, it would represent less than six months of profits. That would mean a smaller dividend, but no losses,” as Noyer put it today on French radio station RTL.

However, Moody’s also points out that each of the French banks, including BNP Paribas, are heavily reliant on wholesale funding. This “may pose a vulnerability given considerable market tension,” the agency said.

In other words, as Jill Treanor says below, if US banks decide they can’t risk lending to their French counterparts, SocGen et al might find themselves caught in a 2008-style liquidity crisis.

8.45am: Here’s some early analysis of the French banking downgrade from Jill Treanor, our banking correspondent:

Markets have been expecting the downgrade by Moody’s to come today or on Thursday, because the agency had warned it might downgrade them three months ago. Since then, the French banks been trying to prevent such a move: SocGen announced €4bn of asset sales on Monday – but was still downgraded.

BNP Paribas’s balance sheet reduction programme announced earlier today appears to have stalled a downgrade for now.

But Greece isn’t the only worry as Moody’s talks about the “structural challenges to banks’ funding and liquidity profiles” for the sector. This may be more of a concern. Just as happened to UK banks in 2007 and 2008, funds in the US are much more reluctant to lend money to French banks.

The boss of SocGen described this yesterday as a “new world which is a bit disturbing”, but stressed at the presentation in New York that the bank was able to find dollars from elsewhere and alter its funding needs in the markets.

All the French banks need to convince the markets that they can keep funding themselves, otherwise the rumours of a government bail out will refuse to go away.

You can read the full report of SocGen CEO Frédéric Oudéa’s trip to New York here.

8.24am: French banks shares have fallen sharply again following Moody’s downgrade — and despite Christian Noyer’s admirable optimism:

Société Générale has been hardest hit, losing 4.2% in the first 20mins of trading. Credit Crédit Agricole is faring slightly better, down 3.2% at pixel time.

The biggest faller, perhaps surprisingly, is BNP Paribas, whose shares have tumbled by 5.1%. It dodged a downgrade – and announced a €70bn asset sale plan. City analysts, though, reckon BNP is on borrowed time.

As Michael Hewson, market analyst at CMC Markets, puts it:

Surely it can only be a matter of time before BNP Paribas follows in their wake, as the bank announces a restructuring plan to increase capital, probably in order to head off a downgrade at the pass.

8.12am: France’s answer to Mervyn King, Bank of France governor Christian Noyer, has just responded to the downgrade — with a classic Gallic shrug.

Speaking to a French radio station, Noyer described the downgrades of two of France’s largest banks as “relatively good news”. Moody’s decision just means French banks now had equivalent ratings to European peers, he argued:

French banks have an excellent rating, the same level as other major European banks, HSBC, Barclays, Deutsche Bank, Credit Suisse. There’s no really bad news on the way, and Moody’s says the level of capital of French banks allows them to absorb any potential losses on sovereign debt.”

The downgrade was “very small”, Noyer added.

8.02am: The City had been braced for Moody’s to downgrade the French banks, since it put the sector on negative watch three months ago. The move is a blow to Europe’s political leaders as they attempt to persuade the financial markets that Greece’s problems can be contained.

Moody’s said that funding conditions in the banking sector had worsened since it started its review – particularly bad news for French banks, which hold .7bn (£36bn) of Greek debt.

Here’s the full details of the downgrade:

The debt and deposit ratings for SocGen were moved from Aa3 to Aa2. The bank’s overall strength rating, currently at C+, remains under review, Moody’s said, with a one notch downgrade likely.

Credit Agricole’s overall bank strength rating was downgraded from C+ to C, while its long-term debt and deposit ratings were moved down to Aa1 from Aa2.

BNP Paribas’s rating, meanwhile, remains on review as Moody’s considers its reliance on wholesale funding, the ratings agency said.

In SocGen’s case, Moody’s said that the bank could cover losses on Greek, Portuguese and Irish debt, but added: “Nevertheless, SocGen’s wholesale funding, the majority of which is short-term, is still high in absolute terms and may pose a vulnerability given considerable market tension.”

The debt and deposit ratings were downgraded to reflect changes in Moody’s assumptions about the level of support the French government might provide in the event of a crisis, it added.

Credit Agricole’s exposure to Greek debt had led to its downgrade: “Moody’s has concluded that although GCA has considerable capital resources to absorb potential losses arising over time from these risks, the exposures themselves are too large to be consistent with existing ratings.”

Moody’s had said in June that it was putting the three banks under review.

7.45am: Good morning. It’s another crunch day for Europe, as the debt crisis that has convulsed the region for months intensifies.

As dawn broke over the City of London, Moody’s slashed the credit ratings of two of France’s biggest banks – Société Générale and Credit Agricole. Both have major holdings of Greek debt – leaving them vulnerable to a default.

A third bank, BNP Paribas, was spared a downgrade, for now, but is planning to sell €70bn (£60.6bn) of assets to patch up its capital reserves.

The move comes as Nicolas Sarkozy and Angela Merkel prepare to hold crisis talks with Greek prime minister George Papandreou. Italy will also be in focus, as the Italian parliament votes on Silvio Berlusconi’s controversial austerity plan.

Back in the UK, the latest unemployment data is released at 9.30am – an opportunity to see how Britain’s own economy is faring.

So, a big day for the eurozone, and beyond. We’ll bring you the latest action and reaction throughout the day.

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