French trouble

European shares retreated on Wednesday to hover near two-year lows, dragged down by Moody's decision to downgrade two French banks, Societe Generale and Credit Agricole, amid growing concerns that the eurozone debt crisis could spread to Italy and Greece might default.

The crisis, which has potential to derail global economic recovery, prompted the United States to urge European leaders to take more effective coordinated fiscal policy measures, while China said rich economies should show they are serious about tackling the eurozone debt problem.

Moody's cut Societe Generale's debt and deposit rating by one notch to Aa3 and Credit Agricole's by the same amount to Aa1. The agency warned that both could have their ratings downgraded further as it assesses "the implications of the persistent fragility in the bank financing markets, given the banks' continued reliance on wholesale funding."

Such a move by Moody's had been widely expected this week after the agency put the two banks as well as rival lender BNP Paribas on review for a downgrade in mid-June. Moody's maintained its Aa2 rating for BNP Paribas because its profits and capital base "provide an adequate cushion to support its Greek, Portuguese and Irish exposure."

But the agency warned BNP Paribas could still suffer a one-notch downgrade after further assessment.

Containing the crisis

Following the downgrade, Societe Generale said Moody's analysis shows that the bank's exposure to Greece "to be modest and manageable."

Earlier this week, Societe Generale's chief executive Frederic Oudea said that the bank was prepared for a downgrade and that it would not change its outlook.

The downgrades come as Europe scrambles to deal with the Greek debt crisis amid mounting fears that the debt-laden nation may have to default. French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to speak with Greek Prime Minister George Papandreou in a teleconference to discuss the crisis on Wednesday.

French banks have been in the spotlight in recent days over their potential exposure to Greece. Both Societe Generale and BNP Paribas issued statements seeking to diminish market fears.

Following Moody's downgrade, shares in Societe Generale were trading 2.4 percent lower. , BNP Paribas stock was down 3.9 percent even though it wasn't downgraded. Credit Agricole bucked the trend, trading 1.9 percent higher.

Speaking to a French radio station, Bank of France governor Christian Noyer called the news of the downgrades was "relatively good." He said Moody's decision means French banks now had similar ratings to their European peers.

"French banks have an excellent rating, the same level as other major European banks like HSBC, Barclays, Deutsche Bank, Credit Suisse," Noyer said. "There's no really bad news on the way, and Moody's says the level of capital of French banks allows them to absorb any potential losses on sovereign debt."

US concern

In a measure of the global implications of the European debt crisis, US Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday.

It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend. US President Barack Obama said that while Greece is the immediate concern, continued market pressure on the larger economies of Spain and Italy could pose an even bigger problem.

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy," EFE news agency quoted him as saying.

Geithner is likely to urge eurozone finance ministers on Friday to speed up ratification of changes to their bailout fund, but a US official said he would not push for an increase in the fund's size.

Author: Ben Knight (AP, Reuters)
Editor: Sam Edmonds