Investors Fret at Costs if Rescues Are Needed

But as bank shares plummeted this week, the question on investors’ minds was not whether governments would rescue their banks if necessary. It was how much a bailout might cost them.

Whether it is Société Générale in France, UniCredit in Italy or Santander in Spain, the fear is that already indebted countries will find themselves in deeper trouble if they are forced to rescue some of their biggest banks.

By one measure, according to a recent report from the Peterson Institute for International Economics, 90 of Europe’s biggest banks hold 4.7 trillion euros ($6.7 trillion) in short-term loans that must be repaid over the next two years. That burden alone is more than half of the combined gross domestic product of the 17 nations that share the euro currency.

“This problem has become cancerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “France will not hesitate to fiscalize its banks — but it will be very expensive.”

Shares of European bank stocks were volatile on Thursday. Société Générale, which has been the focus of the greatest fears, ended the day up 3.7 percent. But its stock price is still down 16 percent this week — and off almost 43 percent for the year.

Shares of Santander climbed 3.2 percent and UniCredit rose 3.4 percent Thursday. But they, too, were rebounding slightly after big recent sell-offs.

In another danger signal, commercial bank reliance on the European Central Bank for short-term loans spiked to a three-month high on Wednesday. Banks borrowed 4 billion euros, or $5.7 billion, compared with 2 billion euros the day before, according to figures released on Thursday. That would indicate the banks are becoming wary of lending to one another, preferring to borrow from the central bank.

“What strikes me in the crisis of the last few weeks is the large content of self-fulfilling prophesies,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso. “The fear that something bad will happen increases the probability that the something bad occurs.”

Heightening market anxiety is the realization that the banks that have promised to participate in the Greek debt restructuring may face larger losses than expected. Société Générale, which has one of the larger Greek exposures among major European banks, already announced a 268 million euro charge early this month.

What is more, Europe’s latest plan to address its bank problem — endowing its rescue fund, the European Financial Stability Facility, with the power to recapitalize banks — will take at least another month to become functional. Parliaments of the euro area countries must vote on the rescue fund’s new charter, and approval is by no means guaranteed.

Despite statements this week by Société Générale that it is in good condition, unconfirmed rumors have swirled through the markets that some of its lenders — including Singapore and the United States — were threatening to cut their exposure.

Addressing the issue head on, the governor of the French central bank, Christian Noyer, said on Thursday that the latest results of so-called stress tests on French banks demonstrated their health and that they had adequate capital to ride out any difficulties.

“Recent stock market movements won’t affect the financial stability of the banks or the resilience they have shown since the beginning of the crisis,” Mr. Noyer said.

And the agency that regulates French financial markets took pains to warn that “the dissemination of unfounded information is subject to sanction.”

The attacks on French banks began amid speculation that French government debt was about to lose its gilt-edged AAA credit rating.

France’s three largest banks — BNP Paribas, Société Générale, and Crédit Agricole — have bulging portfolios of French government bonds that represent substantial portions of their core capital. The latest worries, focused on the prospect of a lower rating for those bonds, could put pressure on the banks to raise more capital almost immediately if a downgrade occurred.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2011/08/12/business/global/investors-fret-at-costs-if-european-banks-need-rescues.html?partner=rss&emc=rss