Today, French bank Societe Generale caused a widespread case of post-traumatic stress disorder for everyone in the markets in 2008 who saw Bear Stearns and Lehman Brothers – and even Morgan Stanley and Goldman Sachs – become temporary or permanent victims of freaked-out shortsellers.
Eerily, this all takes place on the fourth anniversary of the start of the credit crisis. In 2007, another French bank, BNP Paribas, announced trouble with its hedge funds. (I like to remember that time as the Last Day Any Financial Reporter Got Any Sleep.)
Naturally, this has set Wall Street chatter to “defcon 2” levels.
Morgan Stanley came out in defense of the French banks this morning. Calling the drop in share price “overdone,” Morgan Stanley laid out a case for why they believe SocGen, BNP Paribas and Credit Agricole should, by rights, be in no danger. So did Sanford Bernstein, which released a research report today titled, “French Banks: Let’s Look at the Reality.”
Their points are similar.
**1. France is not likely to get downgraded: **
Morgan Stanley: “First of all both Moodys and S&P have reiterated the stable outlook on [France’s sovereign debt] so probability of short term downgrade is very limited
Sanford Bernstein: S&P has declared that France’s AAA rating is stable. That is completely in line with the reasons for the downgrade of the US, which was more about concerns over the willingness of the US to pay than the ability of the US to honor its obligations. There is no indication whatsoever that France would waver in its determination to honor its obligations. In fact on July 21st, they signed along with the other European nations an undertaking to “honor their sovereign signature”. That is not to say that France would not need some structural reform to rebalance its budget, but that in itself does not warrant an immediate downgrade.
**2. The banks are well-funded. **
Morgan Stanley: “BNP is 100% funded for this year and SOCGEN 93% (ie issuance of E1.8bn needed in [the second half of the year]…ie NOTHING)…in short funding is not an issue for this year for SOCGEN and BNP.
The Morgan Stanley note goes on to say that if France did see its rating pulled down and found it more expensive to borrow money, BNP and SocGen should not be affected because they don’t need any more funding this year.
Sanford Bernstein makes the point that SocGen and BNP Paribas stored a lot of cash and similar assets – a “liquidity buffer” – to help themselves in the case of a crisis. This is important because Lehman Brothers and Bear Stearns went down largely because they relied almost entirely on short-term borrowing; when things got bad, other banks would not lend them money to meet their obligations. SocGen and BNP Paribas seem to have a cushion:
“SocGen has a liquidity buffer of €105bn versus €92bn of short term debt. As of Q2, 2011, Societe Generale held a portfolio of highly liquid un-enecumbered assets as a liquidity buffer. Its short term debt outstanding stood at €92bn.
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BNP has a liquidity buffer of €150bn and short term borrowing est. at €160bn. This again should cover the bank in case of a freeze in the short term borrowing markets.”
Sanford Bernstein agrees with Morgan Stanley: “We think the current sell-off is not justified and reflects more the fragility of the market. A trigger from a highly illiquid market has been hurting the stocks well beyond justifiable concerns about future earnings or potential capital raisings.”
3. Look at who’s panicking
Sanford Bernstein writes, “Today bond yields in France continue to come down, i.e., bond prices are going up. The concern comes from the CDS market.” The CDS market is for credit default swaps, which are like contracts that allow investors to protect themselves against the failure of a bank or a country. Sanford Bernstein points out, however, that there are far fewer traders in CDS and that it is a “thin” market because of that, where smaller sales may have a bigger impact on the overall market. France’s country bonds, which are part of a bigger and more robust market, are actually *rising * in value.
These views are valid. But what everyone knows and worries about is that, in the event of a panic, people become irrational.
Update: added the CDS point.
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