The No-Win French Bank Situation
This morning started with an explosive headline reminding everyone that the worries about France and its banks are going to take more than one day to resolve.
Here it is, in tweet form:
RT @ReutersJamie: reuters exclusive:1 bank in asia cuts lines to major french banks, 5 others in asia reviewing.
Why is this explosive? Because it shows that yesterday was not just an anomaly in worries about French banks; it's the beginning of a period of irrationality. If it keeps going in a downward spiral, it has the makings of a panic.
It pays to note, here, that the news story is thin on some crucial details. The bank that allegedly cut the credit line didn't actually cut it - it's just reviewing requests on a case-by-case basis. That bank is also not named.
The main problem here seems to be that the world is worried about France's credit rating. Currently, France is rated AAA; yesterday, the market was flooded with worries that France's credit score would be cut down a notch.
Now, we know that S&P downgraded the U.S. last week with very little actual effect; Treasury bonds sold like the proverbial hotcakes at an auction yesterday, and life has gone on.
But France is not the U.S. It is a much smaller country, where the impact of a downgrade would be felt much more keenly. More importantly, France was one of the few (okay, two) countries in the Eurozone that didn't seem to be skirting the edge of disaster, as Italy, Greece, Portugal, Spain and Ireland have been for the past two years. France, with Germany, was thought to be one of the stronger economies in the Eurozone.
Here's the strange thing: there is no indication that a downgrade of France is even a possibility. S&P and Moody's both have a stable outlook on the country.
And even if Asian banks did pull their credit lines from France's banks, it seems that would be a primarily symbolic move right now. As analysts noted yesterday, both Societe Generale and BNP Paribas have strong cash cushions and don't need to borrow much money for the rest of 2011. So they would be able to survive for at least a while even if other banks lost faith in them.
And yet, as the Wall Street Journal smartly puts it, the market has downgraded France already.
In 2008, the answer to this problem would have been easy: nationalize the banks. Once the banks are taken over by their home country, they would be safe.
As Peter Boockvar, a smart strategist for Miller Tabak, wrote in a note to clients today:
*In a clear sense of Deja Vu, French banks are down again even with the denials of "all" market rumors and late day defense of Soc Gen by its CEO. A story around that I've seen no details on said an Asian bank "has cut credit lines to major French lenders" and other Asian banks are reviewing their counterparty risk. One thing to keep in mind with the French and its socialist bent, if this situation deteriorates further, we can be damn sure these banks will be nationalized in some way. There will be no tea party like rallies at the Eiffel Tower protesting against bailouts. *
But this isn't 2008. The government can't save the banks; it's the connection to the government that's hurting French banks right now, at least in terms of how they're perceived. French banks are suffering from their deep interconnection with the French government, which is struggling to find its way in a new era of bailouts, austerity and a crumbling Eurozone financial structure. Shoving a perfectly fine bank under the wing of a shaky government doesn't seem like an effective recipe for stopping a panic.
As Boockvar notes:
"The problem though with these European banks of course is that their issues reside predominantly with their sovereign bond holdings."
So what to do then? Blame the shorts, of course. Short-sellers are investors who bet that a stock will go down in value rather than up. In panics, short-selling tends to be a popular strategy (as is just plain selling). So it's no surprise that the Reuters headline was followed by one from the New York Times: "EUROPE SAID TO CONSIDER BAN ON SHORT SELLING."
That was what the United States did in 2008. Its effectiveness was questionable.
Europe seems to be where the United States was in 2008. Unfortunately, that means being completely at a loss as to how to stop a rumor before it becomes a panic.