--Greek unit ratings shoved deeper into junk territory
--Both banks cut a further two notches
--Moody's says Greek exit could sharply accelerate deposit outflows
French banks Credit Agricole SA (ACA.FR) and Societe Generale SA (GLE.FR) suffered a further blow from the euro zone crisis late Tuesday when Moody's Investor Services downgraded their troubled Greek businesses, shoving them deeper into junk territory.
Moody's lowered its ratings for Agricole's Emporiki Bank of Greece and SocGen's Geniki by two notches because of the increased possibility that Greece may exit the euro zone.
The deposit and debt ratings of each were cut to Caa2, eight notches into junk territory, from B3, and with negative outlooks. The downgrades conclude a review initiated by Moody's in December.
In February, Moody's launched a review for possible downgrades of 114 financial institutions in 16 European countries, highlighting the banks' vulnerability to the euro zone sovereign debt crisis.
Moody's said the risk of a Greek euro exit could increase further following Greece's parliamentary elections June 17.
The country's fresh elections are being viewed as a de facto referendum on Greece's future inside the euro zone, pitting the political party Syriza against New Democracy and the socialist Pasok party, who together support the reform program Greece agreed with its European and international creditors in exchange for a recent EUR130 billion ($160 billion) bailout.
Although it isn't Moody's base case scenario, a Greek exit would significantly raise the potential for a sharp acceleration of deposit outflows, which could lead to a deposit freeze and ultimately a currency redenomination that would entail significant losses to depositors, the agency said.
It said that a deposit freeze in Greece would prevent the banks' parents from supporting the obligations of their Greek units towards depositors and other creditors, regardless of their financial capacity or willingness to do so.
Agricole and SocGen both declined to comment on the ratings, which traders said were widely expected and had already been priced into the banks' shares.
"It's certainly not good news for the two French banks, but all of Greece's problems were already priced in," a Paris based trader said.
Agricole, which a few years ago had ambitions to become a key player in Southern Europe, has been hit particularly hard by the sovereign debt crisis. Its high exposure to Greece through Emporiki has weighed heavily on its earnings since it took the bank over in 2006.
SocGen's Greek bank is much smaller than Emporiki and SocGen has said that it could support any outcome in the Greek crisis.
At 0919 GMT, SocGen shares were up 3.7% at EUR17.83, while Agricole was up 3% at EUR3.11. Both were broadly in line with the Stoxx Europe 600 banks index, which was up by around 2.7%.