As a result, shares in SG fell by 14% and the bank lost three billion Euros in market value…
Britain’s FTSE 100 index fell by 3% and the Dow Jones by 4.6%.
French banks in general suffered yesterday since they are particularly exposed in Greece, holding over 40 billion Euros worth of Greek debt. SG alone holds some 2.64 billion Euros worth.
Crédit Agricol shares fell by 11.8% and BNP Paribas 9.5%.
The rumors, however, proved to be baseless. Standard and Poor’s, as well as Fitch and Moody’s, the three major rating agencies, all denied on Wednesday that France was about to be downgraded….
In addition, the Daily Mail, source of the rumors concerning the parlous financial state of SG, issued the following statement:
In an article that appeared in the print edition and online version of the Mail on Sunday on August 7, 2011, it was suggested that according to Mail on Sunday sources Société Générale, one of Europe ‘s largest banks, was in a «perilous» state and possibly on the «brink of disaster».
We now accept that this was not true and we unreservedly apologize to Société Générale for any embarrassment caused.
It remains to be seen whether SG’s beleaguered and now considerably poorer shareholders will accept the apology…
Yet, yesterday’s events made the following abundantly clear: investors are not the least interested in facts, and much prefer rumors, for the corrections, denials and apologies had little effect, as stock markets plunged across the planet…
The rumors presumably seemed sufficiently credible, in the eye of the average investor, to prod the latter into speculating against SG and other major French banks and firms.
As the NYT pithily put it, investors have played Who’s Next with the shrinking list of nations that still hold the top rating of AAA.
Though they may have been in the mood to play, no one else was.
Why is France being targeted?
Presumably, because it has the weakest economy among those nations retaining an AAA rating.
France’s budget deficit currently stands at 5.7% of GDP, the second highest in Europe after Britain.
The country’s debt, 85.3% of its GDP, is also the highest among all of the European countries holding the AAA rating.
We think from a fundamental perspective that France is due a downgrade. In essence, France is the country with an AAA rating that can least afford to pay into any future eurozone-wide bailout scheme, Lyn Graham-Taylor, a strategist at Rabobank, told the BBC.
Analysts at Citigroup concurred: we expect that France, with its high public debt and deficit, and popular resistance to cutbacks in its, even by euroarea standards, extremely large welfare state, is now likely to be the G7 country at the highest risk of losing its AAA rating, they indicated, according to The Guardian.
So, what can and should be done?
Stimulating economic growth is the obvious solution, yet difficult to achieve when you are simultaneously compelled by the markets to cut your budget deficit, and debt level.
France’s economy is only expected to grow by some 2% this year (while unemployment hovers around 9%), which is insufficient to significantly address the deficit and debt issue.
Though little interested in facts, the markets are looking for indications however, that political leaders in the US and EU are serious about tackling the deficit and debt issue.
It boils down to a crisis of confidence. We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible, Philip Finch, global bank strategist at UBS, told the NYT.
The markets are therefore, looking for leadership, but will any be forthcoming?
On the European level, that is unlikely since there are no mechanisms in place to address effectively this pressing issue.
The Eurozone’s structure for coping with its debt problems at the relevant monetary union level aren’t even in place, let alone operational, Jean-Louis Nakamura, chief investment officer at Lombard Odier Investment Managers, told The Guardian.
As such, leadership must come from within the nations of Europe, and particularly, from France's Nicolas Sarkozy, who must act decisively and expeditiously…
Yet, with presidential elections looming in 2012, will Sarkozy risk taking measures to curb the deficit that are bound to be unpopular?
He has vowed not to increase taxes so as to avoid stiffling economic growth, however anemic it may be.
Yet additional revenues need to be found if France is to limit its budget deficit ot 5.7% for 2011, as it had pledged to do so.
Tax shelters and loopholes are thus the likeliest targets of France’s deficit-cutting efforts.
There are some 500 provisions in the French tax code that allow taxpayers to lighten their tax burden. The government needs an extra 5 billion Euros in revenue to reach its objectives.
Ultimately, however, Sarkozy shall have to decide whether it is more important to adopt the necessary policies to reduce France’s deficits, no matter how onerous they may be, or resort to cosmetic measures to enhance his electoral prospects.
President Obama once said he preferred to be good one-term president than a poor two-term one…
If he is true to his commitment to rather be a good one-term president, then this is the character test. In some respects, this is the 3 a.m phone call, David Rothkopf, a former Clinton administration Commerce Department official, told the NYT, referring to the US president’s current predicament, remarkably similar to Sarkozy’s.
Sarkozy should make the same pledge and act accordingly.
In any case, if he resorts to half-measures, the markets will react mercilessly.
Despite their haste and irrationality, this may be the markets’ redeeming feature: compelling leaders to take measures they could not or would not even previously consider politically palatable…
Yet there is one way, and only one way, to impose dire sacrifices on a nation, sacrifices necessary to solve the deficit and debt crisis and that entail a fall in the standard of living of the majority. People are ready to make sacrifices, but they are not willing to be cheated. You have to explain who is going to pay and how it will spread out over society. People aren’t willing to accept that part of the society pays while others have an easy life, Mario Baldassarri, head of the Italian Senate finance committee, and a member of the opposition, told the NYT.
In the US, a balanced and responsible anti-deficit policy would be based on increasing taxes on the wealthy and reducing the cost of defense and entitlement programs.
A similar recipe is necessary in France.
Indeed, why should the majority, which is just getting by at best, accept cuts in benefits and in its standard of living, if the wealthy are not also required to contribute to the common effort, in proportion to their earnings and holdings?
In the end, a successful policy will be based on justice and equity.
In addition however, our leaders must lead by example, it is a question of credibility, and remember who entrusted them with the powers they wield, and that their duty is to serve us and not themselves.
They must also share the burden if it is to be accepted by us all, and renounce their excessive perquisites and privileges, at least for the duration of the deficit and debt crisis.
Only then, will they have the necessary authority to demand sacrifices form the rest of us.
Such a political approach demands leadership, and thus could prove politically costly at the polls, yet it is the only viable one…
Sarkozy is to announce additional deficit reduction measures on August 24...
Will he have the courage to address the issue seriously?
(the photograph above is by AFP)
