With solvency in doubt, broad decline in European banks [update]

A Bloomberg article reported on how the decline in European bank stock prices is related to questions about solvency - both of the host countries and the individual banks.

European stocks fell to a two-year low amid speculation the region’s debt crisis is spreading... 

Societe Generale (GLE) SA, France’s second-biggest lender, plunged 15 percent as a measure of banks tumbled the most in two years.... 

The benchmark Stoxx Europe 600 Index slid 3.7 percent to 223.71 at 4:34 p.m. in London, erasing an earlier advance of 2.2 percent. The measure entered a bear market on Aug. 8 and has declined 23 percent from this year’s high on Feb. 17 on concern that Europe will fail to contain its sovereign-debt crisis and that the U.S. economic recovery is faltering....

France’s top credit grade was affirmed by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings as yields on the nation’s debt climbed on concern that Europe’s sovereign debt crisis is intensifying. 

Banks retreated 6.6 percent, the most since March 2009. Societe Generale lost 15 percent to 22.13 euros, the biggest drop since October 2008. BNP Paribas (BNP) SA, France’s largest lender, sank 9.7 percent to 35.53 euros and Credit Agricole SA (ACA) plummeted 13 percent to 5.97 euros, a two-year low. 

“Societe Generale issued a warning recently, which makes it very vulnerable to market rumors and that’s why the stock is getting hit today,” said ETX Capital’s Huber. The French bank said on Aug. 3 that it may miss its 2012 earnings target after second-quarter profit fell 31 percent because of a writedown on Greek government debt. 

Societe Generale “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the bank said. 

Banco Santander SA (SAN), Spain’s largest lender, declined 6.3 percent to 5.95 euros. UniCredit SpA (UCG), Italy’s biggest bank, fell 7.5 percent to 98.65 cents, while Intesa Sanpaolo SpA (ISP), the second-largest, slumped 11 percent to 1.17 euros.

Update

A Telegraph article provided a lot more on the French bank solvency crisis. 

The political drama came as swirling rumours set off a collapse of French bank shares.

Société Générale fell 21pc before recovering partially, plagued by fears that it may be heavily exposed to tumbling global stockmarkets through its role in the equity derivatives market. Credit Agricole closed down 13pc, and BNP Paribas fell 10pc. 

French banks have €410bn (£360bn) of exposure to Italy alone according to the Bank for International Settlements. The twin crises in France and Italy are now intimately linked and appear to be feeding on each other. 

The MIB index on the Milan bourse fell 6.7pc as the euphoria following the European Central Bank's intervention in the Italian bond markets gave way to angst that the EU bailout machinery may not be large enough to back stop the whole of southern Europe. 

France's CAC 40 closed down 5.5pc. 

Morgan Stanley said the flight from French bank equities was "overdone". 

BNP Paribas does not need to tap the capital markets this year, while SocGen is 93pc funded. The European Central Bank has kept its lending window open and offered a 6-month tender. 

Julian Callow from Barclays Capital said the credibility of the €440bn rescue fund (EFSF) depends on France retaining its AAA rating. 

That is now highly questionable despite assurances from all three rating agencies on Wednesday that nothing had changed. 

"The debt ratios of the US and France are very similar. France also suffers from economic rigidities and now has this extra burden of the EFSF. People are asking themselves whether S&P can downgrade US without downgrading France," he said. 

Mr Callow said France has a current account deficit of 3pc of GDP, unlike other members of the eurozone core. This is a sign of slipping competitiveness and a warning that France may struggle to carry the burden of escalating bail-outs. 

French industrial output fell by 1.6pc in June and economic growth ground to a halt in the second quarter, further eroding budget finances. 

The fiscal deficit was running at 7pc of GDP in the first half. It will take draconian cuts at this point to meet the 5.7pc target agreed with the EU. 

With Spain, Britain, and even Italy now forcing the pace on austerity, France cannot appear nonchalant. Italy's premier Silvio Berlusconi met union leaders on Wednesay to forge a deal on €20bn of anti-deficit measures and labour reforms demanded by the ECB. 

He has recalled parliament to vote on a balanced budget amendment to the constitution. 

The ratings agencies are under intense pressure in Europe and may no longer be able to carry out their work effectively. Italian prosecutors have raided the offices of S&P and Moody's in Milan, accusing them of issuing "false and unfounded judgements" on the Italian financial system. 

S&P said the accusations are "without any merit" 

The Procura di Trani said the agencies had jumped the gun by issuing a report in early July on draft budget proposals. 

Three analysts from S&P are accused of "market manipulation" and "abuse of privileged information" by issuing "inaccurate" reports over a period of several months. 

This sort of judicial action against rating agencies is highly unusual. If it is shown in any way that the charges are politically motivated, the episode may inflict damage to Italy's reputation as a safe place to conduct business. 

Marchel Alexandrivich from Jefferies Fixed Income said investors are worried that the latest contagion to France could bring the eurozone's bubbling problems to a head in a dramatic fashion. 

"If France is dragged into the problem, then we will hit crisis point. They will either have to move to a full-blown eurobond -- and German politicians are set against that -- or face a break-up. There is a significant chance that the euro will no longer exist in its current form within twelve months," he said.