By: Dr. Mike Campbell

A few months ago, rumours that the ratings agencies were about to downgrade France’s AAA credit rating in the face of its sovereign debt abounded. The rumours were hotly denied on all sides and have been seen to be baseless (for the time being anyway). However, it is important not to lose sight of the fact that the vast majority of the ratings agencies’ business is to pontificate over the worth of commercial organisations in terms of credit ratings.

Moody’s has acted to downgrade the credit rating of two leading French banks; Crédit Agricole, Société General, with a third, BNP Paribas under review. The two banks were downgraded from Aa2 to Aa3. The main reason for the move was to reflect increased risk to the banks because of their exposure to Greek sovereign debt (the ratings agencies being less than convinced that Greece can avoid a default in the longer term; IMF and EU reassurances notwithstanding).

Société General has €6.6 billion in exposure to commercial and sovereign Greek debt whilst for Crédit Agricole, the figure is €27 billion (BNP has €8.5 billion of exposure).
The agency stressed its opinion that all of the banks in question were well able to absorb any losses stemming from the Greek crisis. The rating is in line with many other leading European banks and still suggests only a very small risk of default.

However, with banking stocks leading the downwards rush of the markets; this latest move will do nothing to reverse the trend. Société General has shed 65% of its value since February; for Crédit Agricole, the figure is 60% and BNP has seen its value fall by 53%. This is nothing: before the financial crisis, the book value of Crédit Agricole was a factor of six higher! When confidence returns to the market, there is a killing to be made from investments in the financial sector, but we have not seen the bottom of the market yet – not by a long way.