Exposure to Greek debt leads to credit downgradesfor key French banks, a move that further erodes investor confidence.
The credit ratings of French banks Societe Generale and Credit Agricole are the latest casualties in Europe’s sovereign debt crisis, an ongoing event that has shaken financial markets and eroded investor confidence.
Moody’s Investors Service, one of three key ratings agencies, today downgraded the long-term debt rating for Societe Generale one notch to Aa3 from Aa2 with a negative outlook. Moody’s concluded that the bank’s capital base “currently provides an adequate cushion to support its Greek, Portuguese, and Irish exposures” but in a press releaseissued today the company expressed continuing concerns about increasing funding and liquidity challenges for the bank.
The ratings agency also downgraded the long-term debt rating of Credit Agricole one notch to Aa2 from Aa1 on concerns over the bank’s “sizable exposures to the Greek economy.”
A review of the financial strengths rating for both banks has been extended and Moody’s warns the banks face the risk of further downgrades.
The downgrade was presaged by Moody’s in a June 15 press release announcing that the agency would review the long-term ratings of three French banking groups, including BNP Paribas, because of concerns over the banks’ exposures to the Greek economy either through their holdings of government bonds or through credit extended to the Greek private sector.
Deposits at European banks have fallen over the last year as frightened investors seek safer havens, and lending between European Union financial firms is slowing, reports Bloomberg News. U.S. money market funds are also reducing their investment in European banks, and the cumulative slowdown in financing is forcing banks to cut lending and raise yields on deposits, moves that erode the banks’ profitability.
Stock in Societe Generale and Credit Agricole fell on news of the downgrade, while the ongoing European debt crisis is fueling a growing pessimism among consumers and investors. Uncertainty over resolution of the crisis is has discouraged investors from taking risks and dampened demand for equities. High net worth investors surveyed by Millionaire Corner in March showed little appetite for risk. (Millionaire Corner defines the Ultra High Net Worth Investor as having a net worth of $5 million to $25 million excluding their primary residence.)
Only 43 percent of these wealthy households expected their financial position to improve within the next year, and only 26 percent expressed willingness to take on significant financial risk in order to earn a high return on investments. Well under half (44 percent) say it is more important to protect principal than grow investments in the current economic environment, and 62 percent say they have learned that their primary residence is not a stable financial asset.