Financial markets are overreacting to concerns that French banks might suffer from exposure to their nation’s sovereign debt, Institute of International Finance managing director Charles Dallara said.
Profitability and capital levels were “quite solid” in the second quarter, even as the banks wrote down the value of some of their securities, Dallara, who is based in Washington, said in a telephone interview yesterday. France has taken steps to rein in its budget deficit and begin the reforms needed to make lasting structural changes to its fiscal policy, he said.
“Some of this is, in my view, market overreaction, which you might even call a touch of market panic,” said Dallara, whose organization represents more than 400 banks and insurance companies. “You look at the French banks themselves, there can really only be one serious point of concern, which is their sovereign-debt exposure.” That concern is “substantially” overblown, he said.
Societe Generale SA said its performance in July and early August shows it will be able to post “solid” results, in an Aug. 10 statement released after its shares plunged 15 percent amid speculation France’s creditworthiness was in doubt. French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet next week to discuss Europe’s sovereign-debt crisis.
BNP Paribas SA, France’s biggest bank, issued a statement after markets closed yesterday dismissing “unfounded rumors” and citing comments by market regulators and the Bank of France underlining the “financial stability” of French banks.
‘Cause to Be Concerned’
France was right to stimulate its economy during the worst of the global recession and it is now “pulling back” from that course to bring its deficits down over time, Dallara said. “There is cause to be concerned, but not in any dramatic fashion,” he said.
Dallara said that banks and authorities are making progress on how to implement a private-sector bond exchange and debt buyback as part of Greece’s new rescue package. The deal, approved last month by European leaders, calls for investors to contribute about 50 billion euros ($71 billion) to the Greek program.
So far, 39 banks from Germany, France and other European nations have agreed to participate, according to the IIF’s website. Dallara said the program is making “steady progress” and that the technical details are on track to come together next month.
“I think it’s a matter of weeks to get this stuff done,” Dallara said. “I don’t think that there is any lack of a sense of urgency here on the part of European authorities.”
Dallara called on European leaders to tackle questions about fiscal integration as they assess the structural changes needed to curb the crisis.
“Do we also not need to move steadily, if not overnight, toward some greater degree of fiscal unity?” Dallara said. “If you alleviate concerns about the medium-term fiscal outlook of Europe, then you will take pressure off of the financial institutions, because that’s where the core of the concern is -- their exposure to their sovereigns.”