Moody's Investors Service downgraded the long-term credit ratings of Societe Generale and Credit Agricole, saying its concerns about their funding and liquidity profiles had increased in the light of worsening refinancing conditions.

It left France's largest bank, BNP Paribas on review, saying its profitability and capital base gave it an adequate cushion to support its Greek, Portuguese and Irish exposure.

"The terms might get tougher after the official downgrade," said Perry Piazza, director of investment strategies with Contango Capital Advisors in San Francisco, which manages $3.4 billion in assets.

The costs for French banks to obtain dollar funding are higher than their US, U.K. and most of their European peers. The benchmark three-month London interbank offered rate was fixed at 0.34711 percent, the highest level since August 2010.

For the three French banks which contribute to the Libor fixing survey, they reported their three-month funding cost anywhere from 2 to 7 basis points above Wednesday's fixing.

The borrowing costs for dollars also rose in the forwards market. The interest rate to borrow dollars for four months a month from now rose to 44 basis points from 39.75 basis points on Tuesday.

The scarcity of dollars to euro zone banks have led a few of them to turn to the European Central Bank for cash.

The ECB said on Wednesday it lent $575 million, which suggests the two banks were probably small, analysts said. But the amount could jump significantly in the near term if worries intensify that cash-strapped Greece may not get its next aid tranche. Talks on the next bailout payment are under way.

END GAME?

Investors and traders have been waiting for measures to ease Europe's debt woes so they do not spiral out of control and cause another global financial crisis.

Hopes of progress helped lower the cost to insure euro zone sovereign and bank debt from their record high levels two days earlier, according to Markit.

"The market is sensing that an end game is getting closer for these banks whether it is capitalization through restructuring or asset sales or a government-assisted capitalization," Contango's Piazza said.

In the credit default swap market, the price to insure BNP Paribas debt for five years fell to 289 basis points from 295 basis points on Tuesday. The five-year CDS price on Societe Generale and Credit Agricole closed lower at 421 basis points and 305 basis points, respectively, Markit said.

In the currency market, the three-month cross currency basis swap, continued to back away from Monday's almost three-year lows of minus 125 basis points and last traded at minus 102 basis points.

Still fears remain high about a possible Greek default given the sometimes conflicting news from Europe. This has left investors reticent to lend dollars to any euro zone banks for more than a week, analysts said.

"Our main concern is headline-based," said Jill King, senior portfolio manager at Horizon Cash Management in Chicago, which manages $2.5 billion.

In a joint statement in Paris and Berlin on Wednesday, French President Nicolas Sarkozy and German Chancellor Angela Merkel told Greek Prime Minister George Papandreou in a conference dall that it was vital for Athens to implement reforms and meet fiscal goals set under a July 21st bailout scheme.

Copyright Reuters, 2011