Rumors had been circulating for days. France? It could lose the triple A of Standard & Poor's on debt, the rating just taken away from the USA. Societe Generale? A bank at risk, perhaps on the verge of bankruptcy. Which will have to be saved with public money. For days, too, the denials have been arriving. From the Government: no, you can't touch triple A. From SocGen: No, we don't need the bailout. Today, however, the markets seem to believe at least in part those presumed allegations.
By around 16:30pm, Société Générale stock was losing more than 20%. On Twitter today there is an incredible traffic of messages concerning the second French bank, one of the giants of European credit. Among its major problems, Greece. A few days ago SocGen announced that it closed the second quarter of the year with 747 million in net profits, down however by 31,1% on an annual basis. A negative result mainly due to a devaluation of 395 million of Greek government bonds held.
Meanwhile, the Paris Stock Exchange is losing almost 4 percent. Nicolas Sarkozy's rushed return to the capital this morning from his holidays on the Côte d'Azur seems to have served little purpose. He brought together some ministers and promised concrete measures for next August 24: cuts in public spending. The goal is to avoid that "cursed" rating cut by S&P, which could have dramatic repercussions on the eurozone.
France is certainly the weakest of the small clan of those within the zone that maintain the AAA rating on their debt (Germany, the Netherlands, Austria, Finland and Luxembourg). Paris had closed last year with a deficit of 7,1% of GDP and expects to close this year at 5,5%, against 3,7% of the Germans and 2% of the Dutch. The goal is to reach 4,6 in 2012 and 3 in 2013.
The problem, however, is that the economy is not recovering as expected, in a country where the manufacturing industry is now only a shadow of what it used to be. And where the trade balance deficit is getting bigger and bigger. Today, the debt risk measured by credit default swaps has grown: CDS on French debt have risen by five basis points to 165.
Although the outlook is stable for Standard & Poor's triple A (theoretically the downgrade is not expected within two years), things could change quickly for Paris too. Too fast.
