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Moody’s downgraded its long-term rating of Societe Generale to A1. Its ratings of Credit Agricole and BNP Paribas dropped to Aa3. If Moody’s had confidence in a solution to the eurozone debt crisis, it probably would not have taken this action. The three banks have a great deal of the region’s sovereign paper on their balance sheets.

Even though Moody’s could have anticipated that leaders in the region would create one or more facilities to help the financial weakest sovereigns, the agency must have forecast that the capital in those facilities would be inadequate. French banks supposedly have larger investments in regional paper than their counterparts in most other nations. There even has been concern that the French government will need to bail out its largest banks with billions of dollars in support.

Comments on Societe Generale from Moody’s are adequate to cover concerns about the other two banks:

As stated in our recent report “Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns”, since the initiation of our review in June 2011, the severity of the crisis facing the euro area has increased. As one of the largest banks in the euro area, SocGen’s creditworthiness is necessarily affected by the fragile operating environment for European banks.

Credit rating agencies still have warnings on large amounts of important paper in the region, and the downgrade of French banks indicates what other downgrades may happen. The agencies have said they will watch other large banks, including the powerful Deutsche Bank (NYSE: DB). The agencies also warned of downgrades of every nation in the region, which would include France and Germany, which currently carry AAA rating on their sovereign debt.

It is ironic that the downgrades should come on the day that European nations set a map for relieving the stress on the debt of the weakest nations. Moody’s did not wait for that action. It sees the problems as too severe.

Douglas A. McIntyre