All eyes on French banks as default fears stalk eurozone

13th September 2011

FT Alphaville brought a range of bleak of assessments in its report this morning. It notes that Sir Howard Davies, former deputy governor of the Bank of England suggested on Radio Four that the French banks would have to be recapitalised in the next two days as a Greek default becomes inevitable.

And FT Alphaville quotes Gary Jenkins of Evolution Securities on Soc Gen's failed attempt to calm nerves. "SocGen's attempt at calming investors resulting in its 5 year subordinated CDS widening 81bps to 797bps (at the height of the 08/09 banking crises the high was 250bps)", he said.

BNP Paribas lost 13% to €26.12, Société Générale tumbled 11% to €15.57 and Credit Agricole sank 11% to €4.83.

The issue is directly related to Greece according to the Guardian, which quotes Bank of Tokyo-Mitsubishi analyst Lee Hardman saying: "The intensifying sell-off … reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehmanesque recession."

Monday's events prompted Governor of the Bank of France Christian Noyer to offer reassurance that the French banking sector could withstand a Greek default.

The New York Times quotes Noyer as saying: "No matter what the Greek scenario, and whatever measures must be passed, French banks have the means to face up to it."

But the paper also reports that behind the scenes the French government is preparing for all eventualities. It adds: "If a recapitalization becomes necessary to restore investor confidence in any French bank – even if the banks do not technically require new capital – then the government will 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 paper also notes that French banks are having to pay more for short term borrowing from US banks. During the peak of the financial crisis a declining lack of confidence between banks exacerbated the financial crisis.

Certainly commentators are very concerned. The Wall Street Journal quotes Spotlight Ideas managing partner Stephen Pope saying: "Investors currently value European banks at levels last seen when Lehman Brothers Holdings Inc. collapsed. One cannot overstate the fear that exists over a Greek default and a following debt contagion escalation. An index of European banks has 46 lenders trading at 0.58 times book value; cheapest since the post-Lehman lows of March 2009."

Bloomberg also makes this bleak report about bank-led market falls in Germany yesterday.

It writes: "Deutsche Bank plummeted 7.3 percent to 21.40 euros, its lowest price in 2 1/2 years. Smaller competitor Commerzbank lost 8.3 percent to 1.53 euros, the lowest price on record. Banking shares were the worst performers amid 19 industry groups in the benchmark Stoxx Europe 600 Index today, falling 4.6 percent."

Bloomberg index says its index of 46 global lenders shows them trading at 0.56 per cent of book value, the cheapest since the post-Lehman lows of March 2009. The wire service say this signals that investors estimate their net assets are worth less than the companies claim and are demanding discounts for perceived risks.

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