European Banks Have Not ‘Come Clean’ About Financial Holdings, Rajan Says

European banks haven’t “come clean” about their holdings, said Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the International Monetary Fund.

“There is a need for some concern because the Europeans haven’t yet come clean on what their banks hold,” Rajan, 48, said in an interview on Bloomberg Television’s “In Business” with Margaret Brennan. “We need to have a better sense of what it means if these sovereigns take a hit and what it means to the banks.”

French President Nicolas Sarkozy and German Chancellor Angela Merkel plan to meet next week as concerns over the spread of the euro-area debt crisis rattled French markets. Societe General SA, France’s second largest bank, plunged 15 percent yesterday amid speculation that a downgrade in the nation’s credit rating would damage the company’s stability. The stock rebounded today, closing up 3.7 percent in Paris trading at 23 euros ($32.68).

All three major credit-rating companies affirmed France’s top rating amid worry that Greece’s debt crisis may spread to the region’s second-largest economy.

“We are some distance away from having to worry about France defaulting and we are some distance away from worrying about the consequences for French banks,” Rajan said today. “It is quite possible the market’s come to terms with this and settled down, but it is something that people do worry about.”

Market Volatility

Volatility in stock markets in the U.S. and Europe is due in part to investors reacting to possible slow growth in the U.S. economy and to the European debt crisis. U.S. gross domestic product climbed at a 1.3 percent annual rate in the second quarter, following a 0.4 percent gain in the prior quarter, Commerce Department figures showed last week.

Investors “can start thinking what if Greece goes? What if Portugal goes, France goes and eventually perhaps what if Germany goes?” Rajan said. “When you focus on those tail risks the only answer is sell.”

To contact the reporter on this story: Jillian Berman in Washington at jberman13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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