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
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