Moody's Investors Service cut the credit ratings of France's Credit Agricole SA and Societe Generale on Wednesday, citing their exposure to Greece's debt, a fresh blow to euro area leaders struggling to restore confidence in the region.
The ratings agency left BNP Paribas on review for a ratings downgrade saying the bank's profitability and capital base provides adequate cushion to support its Greek, Portuguese and Irish exposure.
In a sign of the international alarm over the crisis, China and the United States urged Europe's leaders to prevent the euro area debt mess — now threatening Italy — from spreading.
President Barack Obama urged "more effective coordinated fiscal policy" by the euro area states. Chinese Premier Wen Jiabao said Beijing was willing to help its biggest trading partner, but added that Europe must stop the crisis from growing.
Investors are increasingly sceptical the debt debacle in the 17-nation currency area can be resolved. Credit markets are factoring in a 90% chance Greece will default on its debts and they demanded the highest risk premium on Italian five-year bonds at auction on Tuesday since the country joined the euro in 1999.
Trying to contain the crisis, Italy is expected to approve a 54-bln-euro ($73 bln) austerity package on Wednesday, although news of the measures has so far done little to reverse investor alarm over whether the euro area's third-biggest economy can manage its debts.
Prime Minister Silvio Berlusconi's government has tabled a confidence motion which would force it to resign if it lost. An initial vote is scheduled for around 1200 GMT ahead of final approval of the austerity package around 1800 GMT.
Greek Prime Minister George Papandreou will hold a conference call with French President Nicolas Sarkozy and German Chancellor Angela Merkel at 1600 GMT.
A rebound in stock prices and the euro stalled in Asia on Wednesday as investors remained spooked about the crisis. German government bonds opened higher.
In an attempt to restore confidence, both BNP Paribas and Societe Generale have announced plans to sell risk-weighted assets to help ease investor fears about funding challenges.
BNP said on Wednesday it would sell 70 bln euros ($95.7 bln) of assets and reduce U.S. dollar funding needs by $60 bln by the end of 2012.
Moody's cut SocGen's debt and deposit ratings by a notch to Aa3 from Aa2 with a negative outlook on its long-term debt ratings. For Credit Agricole , it downgraded its bank financial strength rating one notch to C from C+, and cut its long-term debt and deposit ratings by one notch to Aa2 from Aa1.
Bank of France Governor Christian Noyer said the Moody's action was relatively good news.
"It's a very small downgrade and Moody's had a higher rating than the other agencies so it's just put them on the same level or slightly better than the others," Noyer said.
Merkel on Tuesday sought to quash talk of an imminent Greek default or its exit from the euro zone. Confused statements from Germany and France over whether they would issue a joint statement on Greece sent markets gyrating up and then down on Tuesday.
Greece has said it would run out of cash in a few weeks and needs an 8 bln euro tranche in October to pay wages and pensions.
Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.
Her economy minister said earlier this week there should be no taboos in stabilising the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone — a move Citigroup's chief economist warned would lead to "financial and economic disaster."
CHINA SUPPORT
Wen didn't specify what steps China, with more than $3 trln in foreign exchange reserves, might take to help Europe.
But a senior Brazilian source told Reuters on Tuesday that the so-called BRICS — Brazil, Russia, India, China and South Africa — were in early talks on increasing their holdings of euro-denominated debt to help ease the crisis.
"We've said countless times that China is willing to give a helping hand and we'll continue to invest there," Wen said in a speech at a World Economic Forum event in China.
He suggested though that the EU would have to reciprocate Beijing's help by moving to grant China "market economy" status, which would lower its exposure in trade to anti-dumping cases.
In a measure of Washington's concern, 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. Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.
Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund, but a U.S. official said he would not push for an increase in the fund's size.
