When two large French banks had their credit rating reduced on Wednesday, the French government and the Banque de France were jubilant.
Perverse, those French? Not really. The French government and central government had a point. The bad news was, in some ways, good news. The downgrade, much feared by the markets, turned out to be tiny and, in a sense, a vote of confidence. The two French banks, Société Générale and Crédit Agricole, were notched down to the same AA3/AA2 levels enjoyed by most other banks in Europe, including HSBC, Barclays and Deutschebank. Another French bank, BNP Paribas, was left at AA2 – above many other Euro banking giants.
That was not much heard on the 24-hour news channels, which reported dolefully every half-hour that Société Générale and Crédit Agricole had been downgraded by Moody's. France, it was implied, was on its way to a banking crisis.
But listen to the opinion of Moody's. "French banks are solid. Their ratings remain high in global terms and among the highest in Europe. They remain profitable and well capitalised."
Banking crise, what banking crise? Significantly, the market reaction to Moody's announcement was cautiously positive. French bank shares, under severe pressure since May, climbed modestly, even before the announcement on Thursday that five central banks were turning on a dollar liquidity tap for all European banks.
Talk of a massive recapitalisation of French banks, even of nationalisation, has, it seems, been misplaced and even, in some cases, mischievous. The alleged "high exposure" of French banks to Greek debt comes to around €50bn. Admittedly, French banks, unlike some competitors, have taken only a 20 per cent "mark down" on the value of their Greek debts, compared to the 60 per cent loss predicted by markets. Even a 100 per cent Greek default, however, would not come close to ruining any French bank.
The wider euro crisis meant French banks have been denied cheap access to dollars by the US money markets. But that problem applied, until the central bank dollar tap was opened, to all banks in the eurozone.
French banks and government officials have been especially angered by some of the reporting in what they call the "Anglo-Saxon" press. SocGen is seeking €1m damages from the Mail on Sunday for a story claiming it was teetering on the edge of ruin. BNP Paribas has asked the French stock market to investigate an article in the Wall Street Journal last week which quoted a senior bank official as saying BNP had been denied all access to dollar markets. Both stories led to sharp falls in the banks' share prices. Both were untrue.
French banks have problems like any European banks. The present euro crisis, whatever else it may do, is already forcing a historic shift in the traditional model of French banking.
Both Société Générale and BNP Paribas have announced that they plan to shrink their operations, especially foreign operations (by 10 per cent in the case of BNP Paribas) to meet the new "Basle 3" international targets for percentages of "own funds" held by banks. If the euro crisis descends into full-scale calamity – say, a Spanish or Italian default – French banks would be in real trouble. But so would British banks and all Western banks and all economies.
None of that explains the market bullying of French banks in the past four months. Recriminations have been flying. The former European commissioner, Jacques Delors, has even blamed the former French finance minister, Christine Lagarde. By calling for an urgent recapitalisation of French and other European banks, she had, he said, fuelled the speculation.
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