French Banks Fall Again on Debt Fears

Exposure to debt, lack of growth contribute to market losses

After a day of pummeling on the markets on Wednesday, French bank stocks led world markets lower once again on Thursday as investors fearing contagion in the euro zone turned their attention to Paris. Exposure to debt from Greece and other peripheral euro zone countries, as well as dim growth prospects, have contributed to losses in bank stocks in the zone, down nearly 30% for the year.

On Wednesday a New York Times report said that worried investors had focused on France as possibly the next AAA country to experience a downgrade in its rating. Despite statements from all three major raters, Standard & Poor’s, Moody’s and Fitch, that the country’s credit rating was not in jeopardy, and despite a statement from the French government as well, panic overrode reason and the country’s bank stocks, particularly Société Générale, its second largest, plummeted. SocGen at one point was down 21% before recovering a bit to close down 14.7%. BNP Paribas, France’s largest bank, saw its shares lose 9.5%.

The rout continued Thursday, with bank stocks leading European exchanges lower. In morning trading SocGen was down more than 8%, with BNP Paribas down 5.5% and Credit Agricole also losing ground.

Reuters reported that the rumors of a credit downgrade for France persisted Thursday, as well as talk of an expanded Greek bailout that would damage French banks and even a government bailout of SocGen. That last contributed to the heaviest trading on SocGen stocks since the crisis in 2008. The bank had the weakest showing among large French banks in July stress tests.

French banks have significant exposure to peripheral euro zone countries’ woes in the form of a substantial amount of debt from Greece, Italy and Spain. In addition, they also carry vast quantities of French sovereign debt.

Bank of America-Merrill Lynch cut the sector to "neutral" from "overweight." In a note, Merrill strategists said, "Having hung on to a value argument for the banks sector year-to-date, our latest downgrade to global growth expectations makes it difficult to sustain conviction in this argument and we lower our sector weighting to neutral. As long as EU peripheral debt issues remain in the headlines despite the best efforts of the European Central Bank, banks will likely remain a focal point for negative risk appetite and we believe this will weigh against optically cheap valuations and low investor positioning."

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