Fear and capitulation in European banks

 
A figure of a bear, symbol for down going bourse trade, is seen in front of the German share price index at Frankfurt's stock exchange

There are two semi-rational explanations for the sharp falls in the share prices of French and other European banks.

Societe Generale's shares are down almost 15%, BNP Paribas has fallen 9.5%, Deutsche is 6.6% lower, RBS has fallen 7.3%, Barclays is down 8.7%, Unicredit (of Italy) is 9.4% lower, Credit Agricole has fallen 11.8% and Commerzbank (of Germany) is 8.8% down.

Strong bankers would weep.

Here are those semi-rational explanations.

First, that the economic recovery in the eurozone has run out of steam - which will lead to big falls in bank profits, especially if borrowers have greater difficulties repaying their debts.

Second, that the ratings agencies could strip France of its AAA rating, in the way that one of them, Standards & Poors, has already done for the US - which could lead to sharp falls in the price of French government bonds, and force big losses on the banks that hold those bonds.

A loss of France's AAA rating could also lead to a downgrading of the debt of French banks, making it more expensive for them to borrow.

But the problem with at least one of those semi-rational explanations is that all three ratings agencies have today said they're not going to downgrade France from AAA, and also that the price of French government bonds has actually risen today, which would be a good thing for French banks.

So the more probable reason for the rout in European banks, which has depressed European stock markets and led to contagion on Wall Street, is simply those very basic emotions that afflict investors from time to time (especially recently): fear and capitulation.

Societe Generale S.A.

Last Updated at 21 Nov 2014, 05:27 ET *Chart shows local time Societe Generale S.A. intraday chart
price change %
37.11 +
+0.67
+
+1.82

Investors see the European Central Bank half-heartedly buying Italian and Spanish government debt, to prevent borrowing costs for those two countries rising to dangerous levels. And they don't see those central bank purchases as a permanent solution.

A more durable solution, perhaps, would be for the eurozone to issue new bonds backed by all member countries - so called euro bonds - to finance loans to financially stretched member states and to strengthen European banks with injections of capital.

But there's a fear that the scale of the fund raising that would be required to shore up Spain, Italy, Greece, Portugal and Ireland - and their respective banks - would foist excessive liabilities on countries like France, which mean it would in the end lose its AAA rating - and that would lead to losses and funding difficulties for French banks.

So if hedge funds are having sport short-selling French and European banks, as I am told they are, we shouldn't perhaps be too surprised.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    -3

    Comment number 67.

    I'm just a speck of sand on a 5 mile beach. So I am buying food for storage, trying to figure what I can make/do for barter and wishing I could sell my house and move to a shack somewhere with fresh water.
    I'm just disgusted with the Credit Rating agencies who created this whole mess. They're downgrading everyone & everything they can because they bought AAA bundles that were bogus.

  • rate this
    -2

    Comment number 20.

    I agree with you, Robert, at this junction we're all running out of options in the EU. So either we go for Eurobonds or we keep buying time with the current measures. If Germany agrees (after all 15 billion per year is cheaper than the costs of a new Deutsche Mark), Eurobond is the way to go but it will not be enough to assure markets which is why a single EU fiscal policy will necessarily emerge

  • rate this
    -1

    Comment number 2.

    Funding sovereign debt is one thing but it is the fundamentals of the major economies that is behind the performance of the stock market. Viewed as a market to allocate funds for investment and to provide returns for savers one can only say not fit for purpose. As soon as I sense the market has peaked (6000+) I am out. It is too nerve racking!

  • rate this
    -1

    Comment number 7.

    Ahh the delaying of the inevitable. And the spending of huge amounts of taxpayers money in the process. Reminds me of 1992 and Soros. This is over. Greece, Portugal etc (Ireland, Italy, Spain) have to accept huge degrades and for once stop blaming the politicians. I mean in Spain you get the dole without having to look for work. So while youth unemployment is high, most have a job anyway.

  • rate this
    -1

    Comment number 18.

    "fear and capitulation" are two words that fit well, if you believe the entire edifice of the market is based upon a foundation of emotion.
    If you believe that the market is an edifice based upon foundations of the value of work done by human beings over time, a better pair of words might be "reason and mathematics". European industry is choking under myriad forms of social regulation.

 

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