French Banks Warned on Their Greek Debt

PARIS—Europe's sovereign-debt crisis washed closer to U.S. shores Wednesday after Moody's Investors Service warned it may downgrade three French banks that rely heavily on U.S. money funds for short-term financing.
Moody's cited the banks' exposure to Greek debt, and added that it may do the same to other euro-zone banks.
The three banks—BNP Paribas SA, Crédit Agricole SA and Société Générale SA—have all said recently that their exposure to Greece remains manageable. Analysts say a Greek default would cause them only small declines in the capital ratios used to measure financial strength. Shares in the three banks all fell 2.5% or more on Wednesday.
Still, the warning from Moody's followed heightened fears over the prospect of a disorderly Greek default, and its impact across financial markets. Investors have begun assessing the so-called contagion risk on global markets should European officials be unable to reach any agreement on how Greece's debt should be restructured.
One place many have been looking is the U.S. money markets, where massive funds buy up short-term debt of sovereign nations, banks and companies.
In recent years, some European banks have been some of the biggest borrowers in these markets. According to Fitch Ratings, as of February, 44.3% of assets at the 10 largest prime money market funds were invested in short-term loans to European banks.
BNP Paribas, Crédit Agricole and Société Générale have been among the biggest borrowers. As of May 31, those three plus another French bank, Natixis, had about $91 billion in outstanding debt with the top U.S. funds, or about 12% of total assets of the funds, Fitch estimated.
While the Moody's downgrade warning didn't impact the credit ratings on the banks' short-term borrowings, and investors for now aren't concerned about any fallout from the warning, the agency's announcement was a reminder of how financial markets remain deeply intertwined.
Money funds are only permitted to buy the highest-rated short-term debt. If those ratings appear under threat, money funds would quickly stop buying the debt, closing off a vital means of financing for the banks.
While many money managers have moved to curb their Europe exposure in recent months, the downgrade could prompt another wave of credit analysis among managers, said Brian Reid, chief economist for the Investment Company Institute, a Washington-based trade organization. "As new information comes to the market, asset managers are going to assess the risk of what they're invested in," Mr. Reid says. "You've already seen a general market pullback."
Some of the banks may now find some investors are willing to lend for shorter periods, said Alex Roever, money market strategist at J.P. Morgan Chase & Co. in New York.
The three French banks, which all declined to comment on the Moody's decision, are exposed to Greece in two ways: holdings of government debt and their own business activities in Greece.
The latest data from the Bank for International Settlements show that French banks have the largest overall exposure to Greece, totaling $56.7 billion, compared with $33.97 billion for German banks. 

s of March 31, BNP's overall exposure to Greece was €5 billion; Crédit Agricole's was €21.7 billion, and Société Générale's was €5.9 billion, according to Moody's. "What has changed is the risk of default of the Greek government," Nicholas Hill, senior credit officer at Moody's, said in an interview. "That raises direct and indirect consequences for the banks that are exposed to Greece."
For now, the affirmation by Moody's that the banks' short-term rating would remain intact "has been viewed positively by short-term investors," said Chris Conetta, head of global commercial paper trading at Barclays Capital.
Mr. Conetta said the banks' short-term paper was in demand on Wednesday.
"I think the market will stay very calm on these specific French banks," Mr. Conetta said. "They are large banks which have experience in the market and have been long-time issuers in the CP market. If anything, some investors may follow the usual pattern and buy CP with shorter maturities until Moody's finishes their review of the credit ratings."
The top French banks are able to borrow for three months at rates below 0.25%, traders said.
Moody's said Société Générale, unlike the other two banks, was under threat of a two-notch downgrade because of a technical review of the potential support it might get from institutions such as the French government or the European Central Bank.
Société Générale postponed the sale of a planned yen bond in Japan, known as a samurai bond, following the Moody's report, according to two people familiar with the planned deal.