European Central Bank President Jean-Claude Trichet said, as he spoke to EU leaders in Brussels, “The crisis has reached a systemic dimension. Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.” His observations are like those of most other economists and politicians in the region, but his warning is too late, especially for some of the region’s largest banks. Several governments expect financial firms to take larger write-downs on Greek debt than was agreed on just two months ago. Trichet should have said the risk to large banks is at least as great as those to national interests.
Anyone who has watched the disintegration of the financial situation in Europe knows that Greece will be rescued, but large French banks that hold Greek debt may not be. It is imaginable that the only way France can keep firms like Societe Generale and BNP Paribas from disaster is to nationalize them. But the government of France will not say so yet. That would begin a panic that is better put off until the last minute, if an unprecedented disaster occurs.
France will be unable to avoid what the U.S. barely did in 2008. TARP allowed American banks to borrow huge sums from the American government, and these banks remained independent. France does not have any such mechanism. There is no reason to think that French politicians, already divided by how much the nation should commit to Greece, will allow bank equity holders to have their interests served, as they were in the U.S. Equity investors in Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) had a chance to recoup some of their investments. The Wall St. bailout was as much aid to shareholders as to the fortunes of the banks themselves.
It has not been lost on French politicians that servicing shareholders and the survival of the financial system are expensive when each is served at once. A systemic breakdown of EU-region sovereign debt valuations will mean the region’s bank system will be altered radically.
Douglas A. McIntyre