Moody's said it downgraded Credit Agricole from AA1 to AA2 and SocGen from AA2 to AA3 because of the two banks' exposure to Greek debt. BNP Paribas, another of France's largest banks, has been kept on review for a possible downgrade. The markets' reactions were predictably speedy: SocGen and BNP Paribas shares were among the worst performing in Europe this morning, with SocGen falling by 4% in Paris, on top of the 15% it fell yesterday, while BNP dropped by 2.7%.
To be fair to all three banks, this wasn't entirely unexpected: Moody's put them on watch on June 15, and it wasn't as though their exposure to Greek debt was a big secret. It's worth noting that Moody's was keen to assure investors that although their exposure put them at risk, the banks in question still have 'an adequate cushion to support [their] Greek, Portugese and Irish exposures'. So although they're at risk, collapse is unlikely. The other mitigating factor is that Moody's had been more generous with its rating for them than peers like Standard & Poor's anyway. Plus, as French Central Bankist (and professional optimist) Christian Noyer pointed out, 'it's a very small downgrade'. So that's alright then.
Still: petit or not, the downgrades do raise the possibility that French banks will require bailing out by their government sooner, rather than later. That's partly because they're coming from a weaker position than UK and US banks with similar exposure to Greek debt, since they were less affected by the credit crisis in 2008, thus weren't recapitalised anywhere near as much as those hit hardest. Of course, on top of a default by the Greeks (which is increasingly imminent), the effect of something like that on the Euro could be catastrophic.
So the question now is about what will happen if the Germans and French can't manage the Euro crisis themselves. Will the Chinese step in to buy a chunk of Euroland? There have been signs of Chinese interest in Italian debt, after all. Although Chinese premier Wen Jiabao has been quoted in the FT this morning rather smugly pointing out that 'countries should fulfil their responsibilities and put their own houses in order'. And although he added that China might be willing to 'extend a helping hand', there appeared to be long strings attached.