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As double dip looms, market fears turn on feeble banks

Video by Yuka ROYER

Text by Benjamin DODMAN

Latest update : 2011-08-19

Investors alarmed by the eurozone’s economic woes have lashed out at the banking industry amid fears that lenders may be struggling to secure the liquidity needed to run day-to-day operations, let alone boost the bloc’s faltering economies.

The slide in European stocks showed no sign of abating on Friday, a day after tumbling bank shares precipitated the steepest one-day fall by European equities in two and a half years.

Europe’s biggest lenders have now endured a fourth straight week of decline amid mounting fears of a double-dip recession in the United States and little indication of an end to the eurozone’s debt crisis.

Leading the pack on Thursday, shares in France’s Société Générale and Britain’s Barclays shed 12.3% and 11.5% respectively, while Germany's Commerzbank fell 10.5%.

Céline Antonin, a eurozone specialist at the Paris-based Centre for Economic Research (OFCE), identified three causes for the slide: “a general climate of fear on the markets, European banks’ exposure to debt and concern about their supply of cash”.

Jittery markets

The eurozone’s lenders appear to have fallen prey to a toxic mix of worrying figures and rumours about their health.

Société Générale, the French bank that made global headlines in 2008 after a “rogue trader” there single-handedly lost €4.9 billion, is a case in point.

Its shares have been mercilessly pummeled, losing a staggering 15% last week in a single day of panicked selling precipitated by an erroneous report in a British tabloid suggesting the French bank was “on the verge of collapse”.

The incident forced the head of France’s central bank, Christian Noyer, to issue a statement dismissing “the unfounded rumours that are affecting French banks”, adding that strong results over the first term of 2011 had demonstrated the banks’ “solidity”.

But many analysts beg to differ.

Debt exposure

The banks’ market woes have underscored growing concern among investors that Société Générale and other French lenders have purchased excessive amounts of government debt issued by Greece, which is still at risk of a default.

Totalling over €40 billion ($57.6 billion), the exposure of French banks to Greek debt dwarfs that of any other European country. Should Greece default, the banks could expect to lose almost half that amount.

Société Générale announced earlier this month that its second-quarter net profit slumped 31% to €747 million, largely because of its exposure to Greek debt that may never be repaid.

But Greek bonds are not the only toxic assets weighing on banks’ balance sheets. As Europe’s debt woes spread to larger countries, including Spain and Italy, so did fears about the unknown quantities of Italian and Spanish debt held by the eurozone’s largest banks.

“The likes of Société Générale have bought significant amounts of debt issued by countries threatened by insolvency, but no one knows just how much,” said the OFCE's Antonin, in an interview with FRANCE 24.

Credit crunch

Analysts say the banks’ woes have been compounded by a lack of clear data, with banks increasingly reluctant to lend to each other because of fears some may be even worse off than previously thought.

Such is the level of mistrust in the industry that lenders are increasingly relying on loans from the European Central Bank. On Thursday, the Frankfurt-based institution said one eurozone bank, which it declined to identify, had paid above-market rates to borrow $500 million a day for seven days.

The signs that banks are struggling to shore up their cash reserves have, in turn, heightened fears of an impending double-dip recession.

“If the money markets run dry, then there is less credit available, investment dwindles, consumption slows down, and so does the economy,” Antonin explained.

Sensing the danger, a number of commentators have spoken this week in favour of a massive effort to prop up European banks.

In an op-ed published in the International Herald Tribune on Tuesday, Gordon Brown, the former British prime minister credited with stemming the liquidity crisis in Britain’s banking sector in 2008, argued that nothing short of “the biggest recapitalisation of banks in European history”, coupled with a revamping of the eurozone, could save the single currency bloc.

Broke already

The problem with governments giving more cash to banks – in addition to the public outcry such a move might provoke – is that it would add to their ballooning debt load.

“Governments have already bailed out the banks,” said Antonin. “Had they given more, their debt problems today would be even bigger.”

Yet, while politicians are rapidly running out of options, Antonin says they could still offer banks some respite by reforming the financial markets.

“Ultimately, nothing can justify a bank like Société Générale losing 15% in one day,” she said.

Eurozone leaders have shown only tentative signs of a willingness to take on market practices, as with last week’s temporary ban on the practice of short-selling stocks, which has damaged banking shares by fuelling speculation about their health.

But critics say at lot more needs to be done. As Moncef Cheikh-Rouhou, a professor of economics at the Paris-based business school HEC, told FRANCE 24: “The financial industry has got to decide whether it will continue its quest for short-term gains, or whether it will start financing the real economy.”
 

Date created : 2011-08-19

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