EU Credit Crisis Becomes Terminal as Moody’s Downgrades Credit Agricole and Societe Generale

Moody’s downgraded Credit Agricole and Societe Generale, which signals that the Greek credit crisis is nearly over. The agency did not say as much, but based on comments from some European officials and global economists, the fight to keep Greece from default is finished. Credit Agricole and Societe Generale have tremendous exposure to the debt of the southern European nation.

Moody’s announcement about Credit Agricole said it would “downgrade of the long-term debt and deposit ratings by one notch to Aa2 from Aa1.” It downgraded  “SocGen’s debt and deposit ratings by one notch to Aa3 from Aa2.”

The reasons given for the actions were nearly identical. It is “their holdings of government bonds or the credit they had extended to the Greek private sector.” The banks have yet  to recognize the impairments that likely will result from a Greek debt restructuring.

Moody’s downgraded Greece three notches to Ca in July. That alone was enough to trigger a reset of the ratings of the two big French banks. For some reason, Moody’s waited another two months to recognize this in public.

Some officials in Europe, particularly Angela Merkel, continue to insist that Greece can be saved. That is not so. Its GDP has fallen 5% in the past year. Its tax collection system is in ruins. Its citizens still march in the streets to protest austerity. Its parliament has established a new property tax that clever Greeks will never pay.

There is an argument that Greece should withdraw from the eurozone immediately and return to the drachma. If this happens, Greek citizens could find their purchasing power reduced by half. It would do what austerity measures cannot do — ruin the Greek living standard. The Greeks, it could be reasonably argued, have brought this on themselves and deserve it.

France may as well admit that it will have to give billions of dollars in support to its largest banks. That necessity is inevitable now; it certainly is being discussed behind closed doors. Since the problems, and their solutions, are imminent, the reasons for playing the secrecy game are over.

Douglas A. McIntyre