In a discussion about the impending doom across Europe caused one way or another by the Euro crisis I happened to offer the opinion that at least two major French banks wouldn't be able to ride out the crisis. This was on a par with claiming that England would struggle in the opening match of Rugby Union's World Cup in terms of outrageous prophecy but somebody had to say it.
And so we woke this morning to hear the news that France's second largest bank Credit Agricole and third-ranked Societe Generale, had their long-term debt ratings cut one level by Moody's.
Even with the downgrade, European markets were holding resilient in early trade amid speculation that China with its deep foreign reserves might still offer support for the region by buying bonds from some of the region's troubled economies.
Moody's lowered Credit Agricole to Aa2 from Aa1 because of its Greek holdings, and will continue to review the impact of funding markets on the rating. Paris-based Societe Generale was reduced to Aa3 from Aa2, with a negative outlook, as Moody's re-evaluated its level of support from the French government. BNP Paribas, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.
Of course the credit agencies can and do get things wrong but there is an awful lot riding on the outcome of today's three-way phone call between Germany, France and Greece. French lenders top the list of Greek creditors with $US56.7 billion in exposure to private and public debt. Credit Agricole has an unprofitable Greek subsidiary, Emporiki Bank of Greece SA, while Societe Generale has a controlling stake in Greece's Geniki Bank.
Market indicators from credit default swap spreads to bond yields are pointing to a near certainty of a default by Greece. This will force holders of Greek debt to write down the value of bonds.
Later this month, 23rd September, Angela Merkel has to try and persuade the German parliament that the European Financial Stability Facility (EFSF) can be changed so that Germany can lead the way in helping Greece out of the rather large hole it has itself in. A 'no' vote will probably be the beginning of the end for both Merkel and the Euro, although I suspect in the case of the latter whilst the British might not want to be part of it for many European companies having to deal in fewer currencies within a 'common market' (nifty title don't you think) is better than the alternative.
For Merkel the last six or seven months have not been great either domestically or internationally and whilst German public support remains high for the EU it has started to wane for Mrs M, as a Reuters correspondent put it last month, when discussing the up and coming vote:
"Merkel's coalition has a comfortable 20-seat majority in the lower house of parliament. But if she is hit with dissent in her own ranks, and is forced to rely on opposition parties to pass legislation to expand the single currency bloc's rescue mechanism -- the European Financial Stability Facility (EFSF) -- then her coalition could collapse, sparking early elections."
Listening to Justin Webb in Berlin this morning it's quite clear that there is a growing annoyance (anger is too strong a word) that the rich countries are now being asked to bail out those with historically weaker economies who have been generally profligate with other people's money - and they aren't all Socialist lead Governments as you'd expect!
There are people who will cheer if Greece goes down the pan and takes the Euro with it but I happen to think that's a very shortsighted view. Yes the EU is a big bloated behemoth that has moved far away from its original ideas and yes the Euro is convenient for tourists and Eurozone businesses but the sheer stupidity of expecting all economies, weak and strong, to somehow find a happy medium or like water find its level was always doomed to failure.