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.