Moody's warns European banks on Asian exposure

Moody's warns European banks on Asian exposure

PARIS (Reuters): Moody's served notice to European banks on Thursday that exposure to Asia's troubled economies could prove costly, warning that it might review or downgrade financial institutions.

On Wednesday, Moody's Investors Service put on review for possible downgrade Credit Lyonnais's A3/Prime-2 deposit ratings and financial strength rating because of what it called the bank's "very large" exposure to troubled Asian economies.

Investment certificates in the state-owned bank fell against the market's trend on Thursday, dropping 3.35 percent to 234 francs (US$38.38) at the close.

Asked in a radio interview on Thursday whether Moody's could be led to take similar action toward other banks in France, analyst Alexandra Sleator said: "It could."

In another step seen related to the Asia crisis, a report issued by Moody's on Thursday in Hong Kong said the German banking system's overall stability did not preclude selective downgrades.

Some bank analysts in France said Moody's move to review Credit Lyonnais's ratings was the most concrete sign so far that the crisis roiling Asia could spread.

"There is a possibility it could extend beyond the region," said a London-based analyst. "There are huge exposures and French banks are among the most exposed."

Sleator said Moody's was in the process of reviewing the exposure to Asia of banks around the world. She said it was a coincidence that it had acted first on Credit Lyonnais.

"We did not choose to focus our attack, if it is perceived as such, against Credit Lyonnais," Sleator told Europe 1 radio.

Noting that some German institutions already have negative rating outlooks, Moody's said that increasingly risky foreign exposure, as well as a continuation of negative domestic trends, would probably eventually result in "individual adjustments downward" in some cases.

But Moody's said deposit ratings of banks in Germany should remain relatively high in global comparisons because of stable franchises and solid fundamentals in many cases.

It also pointed to strong statutory support for public-sector banks from their regional or local governments.

Bank analysts in France called the overall situation for Europe's banks worrying, but said that for now the Asia crisis carried no broad threat.

"Near term we'll see almost no impact but the big issue is 1998," said one. "It is really a question of how long the crisis is going to last."

They said Credit Lyonnais was a special case because of its troubled history and relative financial weakness.

"The problem for Credit Lyonnais is that its capital is limited. If it is hit by losses, the question is whether the state has the capacity to recapitalize it and whether the French taxpayer will accept it," said an analyst in Paris.

The French government is in talks with the European Commission about a third state bailout for the bank, which nearly collapsed after a wild expansion spree in the 1980s.

Credit Lyonnais's rescue by the state is a very sensitive matter in France because estimates of the final cost to taxpayers run to more than 100 billion francs.

In a separate radio interview, a Credit Lyonnais top executive said Moody's had made its decision without complete information.

"I point out that she (Sleator) does so without having examined our Asian risks," executive Pascal Lamy said on Europe 1 radio.

"She looks at the total sum that Credit Lyonnais has on Asian countries and she does not look at the nature of the risk, which is obviously a problem because there are some good risks and some not so good risks," Lamy said.

Sleator had earlier defended the decision as prudent.

"All we are saying is that if the crisis in Southeast Asia is not resolved in a satisfactory way, the losses that could come from Credit Lyonnais's portfolio could be such that they would consume a good part of the bank's share capital," she said.