The merry-go round of Europe continued last night. The CDS spreads on banks were up and down:
French bank credit default swaps have recovered from early morning wides on Thursday but Societe Generale is still much wider than the previous session’s closing levels.
BNP Paribas five-year credit default swaps reversed early losses to trade 7.5bp tighter at 230bp, Markit said, having widening to 245bp earlier.
Societe Generale CDS was 31bp wider at 365bp, having hit 371bp in early trade, Markit said.
And the wild ride continued on their shares:
Société Générale’s shares were up 9% in early morning trading, down 9% in the late morning and finished the day 3% higher. Investors don’t know what to think about French banks.
That is because two forces are pulling in opposite directions. On one hand, SocGen’s supporters make a credible case that the bank’s capital and funding arrangements are solid. French banks do not appear to be making heavy use of the European Central Bank’s back-up liquidity facilities and analysts agree that funding is in place for the rest of the year. So, in theory, there’s nothing to worry about, even if strains in the eurozone banking system are becoming more apparent.
On the other hand, the market knows the eurozone crisis could erupt at any moment since the ECB’s bond-buying programme in Italy and Spain is only a temporary fix. In their usual ruthless way, investors are looking for the weak spot and France, and French banks, are obvious suspects.
As of about 1 hours ago, 4 european markets have announced that they will be restricting short selling:
The speculative practice of short-selling will be restricted from Friday in Belgium, France, Italy and Spain to combat “false rumours” that have destabilised the markets, European regulators said.
The European Securities and Markets Authority (ESMA) said in a statement that the four countries “will shortly announce new bans on short-selling or on short positions.”
This was “to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets.”
In France the chairman of the Financial Markets Authority (AMF), Jean-Pierre Jouyet, told AFP the body had decided to ban short-selling of 11 shares for two weeks.
The ESMA did not detail the measures to be taken in the other three countries. The decisions were taken after securities regulators in Paris said the French stock market had plunged since Wednesday because of unfounded rumours.
I am not sure how unfounded these rumours are. As I reported yesterday the Greek situation continues to worsen because austerity is refusing to behave the way the Euro-elite think it should:
In a statement, the [Greek] Finance Ministry said that the cumulative state budget deficit rose to €15.51 billion in first seven months of the year—compared with €12.45 billion a year earlier, while net budget revenues fell 6.4% budget expenditures jumped 7.1%.
The European banks have already had to take large write-downs under the initial Greek debt restructure but this was under the assumption that the problem would now slowly get better. I have talked previously about why that is not going to happen so the banks will continue to remain vulnerable. I have expectations that other European nations under austerity will be making similar announcements over the coming year (if we get there).
But French banks are caught in a double whammy because they are also exposed to French government debt which the market now also sees as risky given the current obligations of France under EFSF and the fact that France itself has the same macroeconomic metrics as the PIIGS:
French government debt, a major source of the collateral used by the [French] banks to fund their day-to-day operations.
Using CreditSights’ database, in just two minutes you can work out that this amounted to €118.73bn (£105bn) at the end of last year.
Break the figure down and you discover that Société Générale’s net exposure to the French government is €16.1bn, about €10bn less than the larger BNP Paribas and about half that of Crédit Agricole.
Notes sent to clients by Credit Suisse, Goldman Sachs and Nomura, all expressed themselves comfortable with the exposures of France’s banks and their funding.
The question, then, is why are the share prices of European banks being hit so hard? Current sector valuations show European banks trade at just 0.8 times their tangible book value and a price earnings multiple of less than six times 2012 forecast earnings.
“I think there is a really worrying trend here,” said one senior London-based credit analyst. “What you could be seeing is counter-parties to the French banks asking them to replace French government debt with other assets. What this means is that the market does not want any more exposure to France because of its own worries over its economic outlook.”
And we saw that exact things last night some Asian banks announced that they were reviewing their position on French Banks:
One bank in Asia has cut credit lines to major French lenders while five other banks in Asia are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral euro zone debt mounts
So slowly but surely the crisis is morphing from a one about a single nation, then a multi-nation, then a continent and now what looks like to be the makings of a liquidity lock-up in the banking system. Yet, as far as I can tell, the leaders of Europe refuse to even acknowledge the size of the issue facing them and have fallen back on a reluctant central bank to try and keep the market upright.
I noticed that my favourite man at UBS, George Magnus talked about these issues on Bloomberg TV last night. So I think I will leave you in his capable hands.