The truth about France?s second largest bank?s current financial situation were questionable, yet the effects of assumptions took little time to spread.
Towards the end of last week rumors were on the loose about France losing its AAA status and Societe Generale (SG) falling into a major financial crisis.
Business requires one to be on one?s toes, to act with hindsight, investors immediately took action.
A British newspaper, the Mail had voiced rumors that SG might be ?on the brink of disaster? but two days later admitted that this was not true.
But by that time second-quarter bank profits had been disappointing and some hedge funds have suffered losses, but that justifies modest price fall. In his blog on Business blogs, Richard Quest, a correspondent for CNN said, ?Prices are set by the marginal buyers and sellers. In effect, a small group of jittery and gloomy investors are establishing a price that is passively accepted by a much larger but inert set of holders. The push is amplified by the great popularity of trading strategies that amount to little more than selling into a falling market.?
For banks such financial fears can act like self ?filling prophecies. Some one says that the bank is in a particular state, those interested act in accordance to this statement, and the bank fits the state it was assumed to be in.
The bank’s stock fell by 23% at one point on Wednesday and was briefly suspended. Then after the Daily Mail released its apology gains were again achieved.
Recently the bank, being France?s 2nd largest, began to come under the spotlight for the big amounts of debts of its European neighbours. On Thursday, France had imposed a 15 day ban against short-selling financial and insurance company stocks.
The bank is not one to be taken lightly. It is a global player in equity derivatives, i.e. financial instruments that are operated to protect to investors against price plunges in stocks, regularly working with organizations such as Deutsche Bank and Goldman Sachs.
SG had revealed that it was one of the largest recipients of The American International Group?s (A.I.G) bailout funds and was allowed to take $ 11.9 billion from them. The French Government is trying to calm the markets and protect their third largest bank. The main fear for investors was that is the rumor was true that France?s sovereign debt was going to be downgraded then the government bonds would be problematic. The banks exposure to Greece is not as large as its American housing market. Yet investors have been more worried about its dealings with the former country?s banks.
An irrational fear, based in a rumor, despite the fact that rating agencies have been clearly denying that they plan to make such a downgrade. And the bank?s executives have also said that SG is securely holding its ground at the moment. Analysts also point out that the bank has a strong balance sheet.
However, the bank is still being forced to pay more than its European peers to borrow. The panic that set in will greatly affect the market.
Besides, the European Bank is there to support banks in the region during unstable situation.
Fr?d?ric Oud?a, described rumors that Soci?t? G?n?rale was having trouble raising money as ?fantasy.?
Although it reportedly paid higher interest than a more stable European bank like Barclays would have had to and in fact, on Thursday Soci?t? G?n?rale was able to raise $2 billion in overnight money, which is typically interpreted as a sign of strength.
SG bought into sovereign debt at a time when those purchases looked mostly risk-free.
In the recent agreement for the latest Greek bailout, it was among the banks that agreed to forgive about one-fifth of the value of the country?s debt and as part of that deal, a pan-European fund is supposed to make money available to help banks that may need assistance covering their losses on Greece ? although each of the 17 euro zone nations? governments will be voting on whether to finance the bailout fund.?This itself shows how strong the bank is?
The French government might need to resort to even to deeper budget cuts if it is to meet its target of paring its deficit to 5.7 % this year.
This year, for the first-quarter the country?s growth went up by 0.9 %, a small amount but the best achieved in 5 years.
Consumers cut spending in the second quarter, especially after the expiration of a cash-for-clunkers program the government had used to stoke new car sales.
The Voice of the Patriots
?People are anticipating future difficulties, not necessarily because of austerity yet, but because everything from gas to food is expensive,? said Thomas Richard, a consultant at Kurt Salmon, a global consultancy firm. Therefore, they need to pay more attention to their spending. The French economy is highly dependent on domestic demand. The unemployment levels in the country remain high at 9.2 %.
Isabelle, a bank teller, who only gave her first name when interviewed by the New York Times said that the government needs time to put its programs in place. ?But France is intertwined with Portugal, Ireland, Greece and even the United States, which have been hit. So we are waiting for a slowdown.?
In a recent report the International Monetary Fund (I.M.F.) said that it expected France to experience a ?robust? recovery over the next 2 years, despite plans to further consolidate its finances.
The fund said that, the yield on the French 10-year bond fell below 3% on Friday, and the spread with German bonds that are considered the safest in Europe shrank to 63.1 percentage points, after going up to 89 points last week. But there is a big risk that growth and exports will weaken if the economies of major trading partners do not begin to recover. Especially Spanish and Italian economies a major downturn could be problematic for France. It added that because of France?s has high public debt and because its banks are significantly exposed to weak Southern European countries, the euro crisis needs to stabilize at a faster rate.
The deficit is expected to fall to 5.7% of gross domestic product this year, the I.M.F. said, while the ratio of debt to gross domestic product will be 85.3 %, another source of concern among investors who have started shying away any country with high debt and low growth, no matter what their stature.
United they fall
SG is not the only one in this rut. Cr?dit Agricole, Citigroup and Bank of America all went down more than 25 % in two weeks.
The weak dollar and economy added to the US financial burden, plus the apparent and definite issues of the eurozone could lead to the banking institutions running out of equity.
Stock market guru Jim Cramer voiced concerns all week because stocks moved in lockstep, distorted the market and represented a “repulsive anti-individual investor edifice.”
For instance, he said gold stocks that benefit from higher bullion prices, or stocks that benefit from lower oil prices, were both drowned with everyone else in a tsunami of trading even though bullion increased and oil decreased.
These concerns go to the heart of capitalism: The market system is supposed to be a valid price-setting mechanism. So probes and punishments must be swift.
Misinterpretations fuel actions that could shake important organizations to their foundation and this intern could have great affects on the economy. It?s best that such widely read news mediums clarify their information.
Sources: Financial Times, Financial Post, The New York Times