Margareta Pagano: La recapitalisation? It's time for the French to swallow their pride


Recapitalisation is the same word in French but it's slightly prettier said with a Gallic twist; not in France, though – there it is a dirty word and only uttered with much hissing.

The latest to deny the need for "la recapitalisation" is Michel Pébereau, the president of BNP Paribas, who has denied twice over the past few weeks that BNP needs new funds. His second "non" came last week after the extraordinary reports that German giant Siemens had taken €500m out of BNP and switched the money into the ECB because of fears over the bank's solvency. Pébereau's denial this time was emphatic, and he made the point that the bank he has run for 18 years needed neither more capital nor money from the government.

I first met Pébereau shortly after his victorious bid for the Paribas investment bank; he was the reigning king of French banking, renowned for being a Catholic with a Protestant work ethic – something of a snub in France. His office was magnificent, all gilt and chandeliers, and just off the Orangerie banking hall in Paribas's head office in the rue d'Antin, where Napoleon Bonaparte married Josephine.

Like his peers, Pébereau went to all the right Grandes Ecoles, and worked in the civil service and the Cabinet office before going into banking. For, in France, banks and the state are inextricably linked. But unlike most of his peers, he was prepared to ruffle establishment feathers, took an Anglo-Saxon knife to costs, and wasn't afraid to lecture the French government on the follies of the 35-hour week. (And, in his spare time, write science fiction.)

Pébereau's BNP has done rather well – by return on equity, it has been Europe's most profitable bank and has one of the sleekest retail operations on the Continent. But, like its competitors, it has lent heavily to the eurozone, and profits in the summer were flat after it set aside €534m to cover Greek losses.

BNP holds the most Greek debt of the French banks – it's estimated to have sovereign debt of about €75bn, equal to about half its total assets; this includes €14bn of Greek debt and €21bn of Italian bonds. France's two other big banks, SocGen and Crédit Agricole, have similar exposures, and about €56bn of Greek sovereign bonds between them.

That's why there's such panic in the French banking sector; and why the loose talk that BNP is negotiating with rich Gulf investors about taking a stake, following hard on the heels of the Siemens story, was so damaging. Once corporate treasurers want to start moving money, it's only a matter of time before rumours infect public confidence – look back to almost exactly three years ago next week, when rumours that companies couldn't get money out of Royal Bank of Scotland started the run on the bank.

It's no surprise, then, that the IMF's warning that Europe's banks are exposed to about €300bn of potential losses on sovereign debt triggered more panic last week. In the US the money market funds have been nervous of lending to Europe for weeks, and have been refusing to lend US dollars because of fears the banks could be insolvent if Greece goes down.

This is dangerous as the US money funds are one of the biggest sources of wholesale funding to the European banking system. Liquidity is likely to worsen over the next few months as there are record quantities of term funding coming up to maturity. The Bank for International Settlements says there is a funding gap of about £2.6 trn between what European banks need to borrow in dollars to pay for investments, and lending in the greenback.

Christine Lagarde, the IMF boss, was spot on when she caused such a stir a few weeks ago warning that Europe's banks need recapitalising. But the worry now is that no one knows for sure which are most at risk, and whether it isn't too late. If banks, particularly the nine smaller ones which fell short on stress tests earlier in the summer, cannot raise capital in the credit markets – there hasn't been a new bank bond issue for two months – then governments or taxpayers are the final back-stop.

So, are BNP and SocGen in denial, or are investors barking up the wrong tree? The bankers I talk to say recapitalising the French banks won't save the world but it could provide just the sort of action needed now. The jazz-playing Pébereau isn't the sort of banker who would knowingly deceive, but, if he's right, the markets aren't listening.

In Paris, the diplomatic chatter is that the French banks are being picked on by the Americans – quite why is not clear. BNP's shares have fallen more than 50 per cent since July over fears that it will be hit hardest by a Greek default. As G20 head, President Sarkozy is being called on to lead the way. More important is action; it's time for Sarkozy and his bankers to swallow their pride and admit to la recapitalisation – without too much snarling.

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