Moody's cuts French banks, eurobond talk lifts markets

Sep 14, 2011, 5:11 a.m.
General view of a branch of French bank Societe Generale in Paris September 13, 2011. REUTERS/Charles Platiau

By Lionel Laurent and Luke Baker

PARIS/BRUSSELS (Reuters) - Moody's cut the credit ratings of two French banks on Wednesday because of their exposure to Greece's debt, highlighting growing risks to Europe's financial sector from a deepening euro zone sovereign debt crisis.

But the euro and European stocks were lifted by an announcement by the head of the European Commission that it would soon present options for issuing a common euro zone bond, despite huge political hurdles especially in Germany.

The ratings agency's one-notch downgrade of Societe Generale and Credit Agricole came hours before the leaders of Greece, France and Germany were to hold a video conference on measures to head off a potential Greek default, which has prompted rising global alarm.

China added its voice to U.S. concerns over Europe's apparent inability to stop debt contagion from spreading, while Indian and Brazilian officials said major emerging economies were discussing increasing their euro sovereign holdings.

Moody's kept BNP Paribas on review for a ratings downgrade saying the bank's profitability and capital base provided an adequate cushion to support its Greek, Portuguese and Irish exposure.

France's biggest bank announced a plan to sell 70 billion euros in assets to help ease investor fears about leverage and funding that hit its two main rivals. Shares in all three big French banks fell in early trading.

With senior EU and IMF inspectors due in Athens on Monday to check Greece's faltering compliance with its bailout plan, Chancellor Angela Merkel and President Nicolas Sarkozy were set to press Prime Minister George Papandreou to enforce harsh austerity measures to meet fiscal targets.

Sarkozy told his cabinet France would do everything possible to save Greece but a government spokeswoman said Athens must give guarantees that it would finally implement agreed measures to cut its deficit.

"We want a guarantee that the recovery plan announced will be put into action," spokeswoman Valerie Pecresse said, adding that no statement would be issued after the call.

While Europe's leaders struggle to avert a first default in the 12-year-old single currency area, the head of the European Union's executive challenged them to prepare for a great leap forward in fiscal integration that would be deeply divisive.

European Commission President Jose Manuel Barroso told the European Parliament that closer union, particularly in the 17-nation euro area, was the only way to reverse the negative cycle in financial markets.

"Today I want to confirm that the Commission will soon present options for the introduction of eurobonds. Some of these could be implemented within the terms of the current treaty, and others would require treaty change," he told lawmakers.

But he warned that such bonds, which face major political and legal obstacles in Germany and other north European creditor states, were no silver bullet to end the crisis, and could only be part of a comprehensive plan.

EU Economic Affairs Commissioner Olli Rehn said issuing common euro zone bonds would require much more intrusive surveillance of member states' fiscal and economic policies, which would have to be fully debated in each country.

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