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We're only halfway through this week and, already, it's been a terrible one for France's banks. That's because fears over these banks' bond holdings have sent their shares sliding southwards.
Dodgy bonds on balance sheets
When the credit crunch hit in August 2007, it happened when banks stopped lending to each other because of fears of hidden losses caused by exposure to iffy subprime mortgage securities.
As the crisis in the eurozone continues, credit markets have been showing signs of stress this summer, with wholesale (inter-bank) lending rates rising. Indeed, earlier this week, the Wall Street Journal claimed that BNP Paribas could no longer borrow dollars. Shares in France's biggest bank slumped on Friday and Monday before bouncing back yesterday after BNP's strong rebuttal.
Of course, BNP is not the only French bank under the cosh of late. Mr. Market is also fretting about France's two other megabanks, Societe Generale (SocGen) and Credit Agricole.
All three banks have significant exposure to sovereign bonds issued by weak eurozone economies, notably Greece. With fears of a Greek debt default causing continued panic this week, investors fear "ticking time-bombs" inside these three French banks.
In June, the three held almost $57 billion of Greek sovereign and private bonds, versus $34 billion owned by Germany's big banks, and a mere $14 billion for British banks. Of course, $57 billion is a tiny sum when compared with the many trillions of dollars of assets owned by these three banks.
However, as at last December, they also had huge exposure to Spanish debt (over $140 billion) and Italian debt (nearly $400 billion). It is this exposure to the ailing bond markets of the Mediterranean that is giving investors kittens.
What's the damage?
Here's how shares in France's three big banks have performed since last Friday:
Between them, the big three French banks have total debt holdings of 4.7 trillion pounds, which is around 2.5 times France's GDP (gross domestic product, or total national output in a year).
Hence, being "too big to fail" (TBTF), their future is closely tied to that of the French nation itself. If push comes to shove, France would surely nationalise any TBTF bank so as to prevent the collapse of its banking system. For instance, the French government bailed out Credit Lyonnais when it faced bankruptcy in 1993.
More bad news from Moody's
Of course, all three banks have denied any solvency problems, yet investors remain anxious about their transparency and close links to the state.
Today, credit rating agency Moody's has downgraded two French banks because of their exposure to Greek debt. Credit Agricole's rating was cut to Aa2 from Aa1 and SocGen's to Aa3 from Aa2. BNP's rating remains under review and could be cut later. Also, all three ratings could face further cuts, Moody's warned.
Already, both BNP and SocGen have announced major asset sales aimed at increasing their liquidity and capital ratios, while reducing their leverage. BNP intends to sell 70 billion pounds of assets, worth a tenth of its balance sheet; for SocGen, asset sales could raise $40 billion. If these restructurings don't calm the market, then French bank shares could fall further.
As for the eurozone crisis, German Chancellor Angela Merkel and French President Nicolas Sarkozy are holding talks with Greek Prime Minister George Panandreou today. Alas, without swift and decisive support, Greece could default within weeks, perhaps days.
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