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French Banks, Public Debt, And The Poison Of Doubt

Analysis: big questions linger after a week in which French bank shares were walloped on the stock market, and some began to wonder if France was the next country whose finances pose major structural risks.

Jean-Marc Vittori

PARIS - Just like in the fall of 2008, banks are at the heart of the financial storm. Yet unlike in 2008, French banks are among the key victims.

The French bank Société Générale lost more than 20% during Wednesday's session, followed by an 8% drop Thursday before a modest recovery at week's close. The implosion was blamed on rumors spreading across the trading floor, which were publicly denounced by the governor of the Bank of France, Christan Noyer.

Nevertheless, the French banking landscape has indeed changed significantly since 2008, for better and for worse. Top banks have built in more financial resistance. For example, BNP Paribas has doubled its core capital (Tier-1) while Société Générale and Crédit Agricole have increased it by half, or more. Some of the most hazardous products have been eliminated. And banks' exposure to risk is much better known, thanks, in particular, to the work of the Bank for International Settlements and the Committee of European Banking Authority.

A reversal of the real estate market, or a drop in economic growth, would of course affect the banks by undermining their small and medium-sized business clients. But that would also be the case elsewhere.

French banks will be forced to raise significant capital in 2012 (they have apparently already settled their financing plans for 2011), but proportionally the amount will be smaller than for their German or Italian counterparts. And French banks have huge liquidity cushions that could enable them to resist a monetary market freeze similar to the one of Autumn 2008. The reserve liquidity of Société Générale exceeds 100 billions euros -- more than its short-term debt.

But worries are now taking root elsewhere. Doubts are deepening about the financial stability of the states themselves. These doubts influence the markets in two ways. First, most French banks count Greek public debt on their balance sheets, while some also have big chunks of Italian debt -- and all of them are packed heavy with French debt.

They have already enacted the provision of de facto spreading of the Greek debt, as laid out during the European summit of July 21. But in the future, a severe depreciation of Italian, and all the more, of French obligations, would be very painful for French banks. Indeed, it could even be perilous.

After that, a penniless state cannot guarantee the survival of the system. "Whatever happens, the State will guarantee the security and the continuity of the French banking and financial system," Nicolas Sarkozy declared in September 2008, in a major discourse about the economy meant to reassure the French people. But the president would not be credible if he said the same sentence again in September 2011. Three years ago, the State was the cure for the financial crisis. Today, the State is the problem. Things have changed indeed.

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