Global bank lobby seeks to calm French bank fears

14th September 2011, Comments 0 comments

The leaders of the global bank lobby sought Wednesday to tamp down fears about the health of big French banks exposed to the Greek debt crisis.

Charles Dallara, head of the Institute of International Finance, expressed surprise when asked about Moody's downgrades earlier in the day on the credit ratings of Societe Generale and Credit Agricole, while leaving BNP Paribas, France's biggest bank, on negative watch.

"It's a bit difficult for me to understand in the sense that we know from the information that was revealed at the time of the stress tests... that the two institutions in question had notable but very manageable exposure to Greece, both direct and indirect," Dallara said in a press conference.

He was referring to the July results of European Union stress tests on Europe's battered banks: none of the French banks failed.

Moody's said its Credit Agricole downgrade was directly related to the bank's exposure to Greece, while that for Societe Generale was linked to a reevaluation of the aid the French state would make available to the lender in the event of a crisis.

Shares in the three big French banks have taken a beating in recent months amid fears that Greece will default on its sovereign debt and the contagion will spread throughout the 17-nation eurozone.

Societe Generale shares have lost 56 percent of their value in the past three months, while those of Credit Agricole and BNP Paribas have shed 49 percent.

IIF deputy managing director Hung Tran recalled that the share price falls may not reflect a company's real fundamentals.

"Markets can overshoot. And in this case my personal observation is that they indeed have overshot," Tran said.

"If you look at the price-to-book ratio of the banks involved, it implies that markets are expecting that the banks write off 100 percent of their holding of governments bonds, not only from Greece but also Portugal, Spain, Italy and Ireland," Tran explained, adding "it is very, very unreasonable."

Dallara acknowledged the interconnectedness in Europe between financial institutions and sovereign risk as "a real challenge."

"We believe the fundamental way to deal with that challenge is to strengthen the quality of the assets on the banks' balance sheets, which means strengthening the credibility of the sovereign signatures of these key members of the eurozone," he said.

"It will take some time for that confidence to be brought back to markets obviously because I'm afraid that the markets have become very skeptical about the sovereign risk in general."

The IIF represents more than 400 of the world's leading financial institutions. Deutsche Bank's Josef Ackermann chairs its board of directors, which includes BNP Paribas chief Baudouin Prot and the head of Societe Generale, Frederic Oudea.

© 2011 AFP

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