TURMOIL ENSNARES BIG FRENCH BANKS / THE NEW YORK TIMES ( VERY HIGHLY RCOMMENDED READINGS )

September 12, 2011



Turmoil Ensnares Big French Banks

By LIZ ALDERMAN

PARIS — French banks moved toward the center of the European debt storm Monday as growing concerns among investors about their ability to handle a potential Greek default raised the possibility the French government might need to take steps to strengthen the banks’ financial positions.


Shares in BNP Paribas and Société Générale, both globally interconnected French banks considered “too big to fail” by the government in Paris, slid as much as 12 percent, continuing a monthlong decline that prompted several government officials to close ranks Monday in a bid to stop the attacks in the market.


Worries about the health of Europe’s banks have taken on outsize dimensions in recent weeks, contributing to significant volatility in stock markets worldwide. Investors have grown increasingly suspicious that Europe’s efforts to contain the crisis that began in Greece are proving too little, too late, despite steps taken by European leaders to avert a default.


But the concerns over Greece and its impact on the French banking sector have deepened by the day.


“No matter what the Greek scenario, and whatever measures must be passed, French banks have the means to face up to it,” the French central bank governor, Christian Noyer, said in a statement meant to assure investors as the French bourse and European markets slumped.


The question of whether the French state might need to nationalize its banks in the event of further turmoil was met with an unequivocal “non” — at least for now.


“It is totally premature to discuss” even a partial nationalization of French banks, the French industry minister, Éric Besson, said during an early morning television interview.


Société Générale, BNP Paribas and Crédit Agricole, are considered integral actors in the French economy, lending billions of euros to businesses and individuals, and the government has said it will never let them any of them fail.


Officials said that the French banks are adequately capitalized and currently do not need the government to provide them with additional funds. Société Générale, for instance, announced Monday that it would raise new cash by selling assets.


But these banks, and others in Europe, are already struggling with a more immediate problem: maintaining their liquidity as their sources of financing from the commercial paper market and other short-term lenders dry up. Over the last month, they have all been having trouble getting dollar funding in the United States and their cost of borrowing in the commercial paper market has soared.


Behind the scenes, the French government is preparing for all eventualities. If a recapitalization became necessary to restore investor confidence in any French bank — even if the banks do not technically require new capital — then the government would be prepared to take such action, said a senior government finance official involved in managing the situation, who was not authorized to speak publicly. The government may need to step in at some point, the official added, but it would be considered a treatment not justified by the banks’ financial fundamentals.


The official also sought to dismiss all speculation that a merger or takeover of Société Générale or any French bank was in the cards. Some traders have speculated the Société Générale could be a takeover target, following months in which its shares have slumped from a high of €52.70 in February to a close of €15.57, or $21.19, Monday.


Meanwhile, Michel Barnier, the French interior markets commissioner, called for “calm and sang froid.”


Markets did not heed his call. The three biggest French banks all fell sharply. Société Générale closed down 10.7 percent, BNP fell 12.3 percent and Crédit Agricole slid 10.6 percent.


In broader trading in Europe, the FTSE 100 in Britain dropped 1.6 percent and the Euro Stoxx 50 index of euro zone blue chips was off 3.8 percent. The DAX in Germany lost 2.3 percent, and the CAC 40 in France was hit hardest of all, tumbling 4 percent.


France’s financial watchdogs are monitoring the bank situation closely, officials said, as is President Nicolas Sarkozy, who would be loathe to see one of the banks stumble or weakened to the point where a merger or takeover might have to happen before the French presidential election next spring.


Still, the government is preparing soothing messages in the event that depositors start to worry too much about the safety of their money, said a French banker who has been involved in discussions with the government and was not authorized to speak publicly.


While depositors have remained calm, Thierry Dissaux, the chief executive of the French Deposit Insurance Fund, said bank deposits in France are insured up to €100,000 per individual and business. But Mr. Dissaux said it was unlikely the fund would be tapped amid the crisis.


“Frankly the worries over the health of the French banking system are beyond reason,” he said during an interview.


Some investors agree. David Thébault, the head of quantitative sales trading at Global Equities in Paris, said his company has started snapping up Société Générale shares, considering them a bargain.


Despite a failure by the Group of 7 finance ministers to take any specific action to mitigate Europe’s crisis at a meeting this weekend in Marseille, investors now anticipate that the U.S. Federal Reserve, the European Central Bank, and other monetary authorities may step in with various easing measures in coming weeks if markets remain volatile and economic conditions continue to deteriorate.


The banks, and Société Générale especially, suspect that their shares have come under attack from speculators betting that the share price will decline — something that the government decided to investigate last month, when the stock of Société Générale alone fell 21 percent in a single trading day before recovering.


The next day, the government imposed a temporary ban on investors betting against the shares of France’s major banks and insurance companies. Société Générale has also told its employees that it is suing The Mail on Sunday newspaper of Britain for publishing an article in August saying the bank was close to collapse, Reuters reported. That article sent the shares into a tailspin, and the bank’s chief executive, Frédéric Oudéa, has been trying to do damage control ever since.

Mr. Oudéa tried to head off fresh trouble Monday before the markets opened, as worries mounted that Moody’s Investors Service might downgrade French banks — his included — because of their exposure to Greek sovereign debt. The bank said it holds relatively little in the way of troubled government bonds from Greece, Ireland, Italy, Portugal or Spain. It said it was stepping up efforts to reduce costs and strengthen its balance sheet, and that it planned to free up €4 billion of capital by 2013 through the sale of assets.


French banks hold fewer Greek government bonds than do Italian banks, although they hold more than German banks, which sold these assets early in the Greek crisis. Société Générale and Crédit Agricole, have only about €2 billion and €800 million worth of Greek bonds, respectively, compared with about €4 billion held by BNP Paribas. Société Générale and Crédit Agricole, however, have greater exposure to the Greek banking system because they each bought a retail banking subsidiary there during the boom years, when expansion was the trend. Should the Greek banking system falter — a certainty if Greece defaults on its debts — both French banks would be in trouble, analysts say.

At the end of the day, though, if Greece defaults, the problem will not be limited only to French banks. “If an accident were to happen on Greece the real problem is to ring-fence the rest” of Europe’s banks, said the French finance official. “Otherwise, the risk is that the whole thing explodes.”