March 8, 2021

Anxiety Hits Shares of French Banks

French banks are loaded up on the debt of Italy and Greece, among other troubled European countries that share the euro currency.

France has become the newest target in the game of Who’s Next on the shrinking list of nations with AAA debt ratings.

And even though the credit ratings agencies and the French government have insisted that France is not in danger of a downgrade, the market anxieties spread wildly Wednesday, engulfing Société Générale, the second-largest French bank. Its shares slumped as much as 21 percent before closing down 14 percent for the day. Stock in BNP Paribas, France’s largest bank, fell 9.5 percent.

Bank shares in Italy and across Europe also tumbled on worries that efforts by European authorities to stem the debt crisis may work for only so long. The cost to insure French sovereign debt against default jumped to a record.

Because Europe’s banks trade billions of euros and dollars daily with their American counterparts, contagion could easily spread, making the stock plunges all the more worrisome. In the United States, both Goldman Sachs and Morgan Stanley were down more than 7 percent in midday trading.

President Nicolas Sarkozy interrupted his vacation on the French Riviera to return to Paris for an emergency meeting Wednesday with finance officials to discuss “the economic and financial situation” of France, which is among the weakest of any big AAA-ranked nation.

“There has been a lot of market noise about France, rather than ratings agency noise,” said Gary Jenkins, a strategist at Evolution Securities. “On the other hand, there was market noise about the PIGS and the United States before they were downgraded,” he noted, using an acronym for the European countries swept up in the debt crisis — Portugal, Ireland, Greece and Spain.

In contrast to the problems of Lehman Brothers and Bear Stearns in the United States that nearly brought down the global financial system in 2008, this time it is fears about European banks that are driving the wave of selling.

Financial institutions across Europe have huge holdings of government and corporate bonds from Italy and Spain, so doubts about their stability are encouraging investors to flee shares of Europe’s biggest banks.

French banks are among the most exposed to Greek and Italian debt, and hold huge amounts of French sovereign debt. Rumors that French banks have been having trouble getting funds after American regulators discouraged United States banks from lending to their euro counterparts also weighed on shares.

Société Générale in particular was hit by rumors that a Groupama, a large French reinsurer that owns about 4 percent of Société Générale shares — the largest shareholder after BlackRock — needed to raise money. Groupama did not return calls for comment.

But David Thébault, head of quantitative sales trading at Global Equities in Paris, noted that many insurance companies and banks were scrambling after Standard Poor’s downgraded the United States to AA+ from AAA to replace those securities, because they were required to hold only top-rated sovereign debt.

“Volatility is very high — we’re in quasi-crisis mode,” Mr. Thébault said. “The markets are reacting to any little rumor.”

Société Générale issued a statement after the close of trading “categorically denying with the most extreme vigor” the “totally unsubstantiated rumors” that caused it shares to slump.

The bank, which reported a 1.6 billion-euro first-quarter profit last week, said it asked the French stock market regulator to open an inquiry into the source of the rumors.

The big fear in the markets, though, is the threat of contagion — whatever the reason for the tumult.

“We’ve been really cautious, and the sovereign crisis is now escalating,” said Philip Finch, global bank strategist for UBS. “It boils down to a crisis of confidence. We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible.”

David Jolly contributed reporting from Paris, Nelson Schwartz and Louise Story from New York, and Landon Thomas Jr. from London.

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