French banks can ‘withstand whatever development’

Quite a week to start off in Paris. The euro crisis seems to be bleeding up from riot-strewn Athens and the periphery to the core; doubts about French banks, and the burdens of the euro bailout, weighing the borrowing costs of the French Republic itself. A ratings agency warned yesterday of a possible downgrade of France’s AAA rating. In bond markets, the cost of French borrowing is decoupling from lending costs for Germany. People are starting to notice that France is also on the Mediterranean.

I met Christian Noyer, Governor of the Banque de France, in Paris at a conference of Sovereign Wealth Funds. His address was not a plea for funds from the conference staged by the Committee on Global Thought/ Amundi/  SWF Research Initiative, although organisers claimed that attendees were responsible for $9 trillion of funding.

Governor Noyer thinks that French banks can raise capital levels entirely from retained earnings. Sovereign Wealth Funds could be tapped by some banks.

When I asked if French banks could withstand sovereign default in the eurozone periphery, he was emphatic: “Absolutely — this has been very much overstated. I don’t think it is at all a problem for them.. and they can withstand whatever development happens especially on Greece”.

Governor Noyer said the total exposure of French banks to the entire euro periphery is €60bn – “in general only a small fraction of their own funds” and “the exposure to Greece which is the only really critical case is only €8bn, it’s less than one half of a year of profits. And they have already provisioned”. He also said “Of course it will be up to [French banks] to find out whether they have to or are willing to raise more capital in the market. And certainly sovereign wealth funds could be in some cases an opportunity”. Though he thought it would be “relatively limited”.

There was, he told me, a key difference between now and three years ago when UK banks were forcibly recapitalised. Then, in 2008, “we had real losses and the banks that suffered..  toxic assets and the banks that suffered big losses had to be recapitalised”. Now he says the problem is not losses but “uncertainty in the markets. So this increase in the capital, wherever necessary, doesn’t mean huge interventions,” he told me. I pressed him on whether the French government has the cash to recapitalise banks, he said: “If needed the French government has the tools, as all European governments have,” but he didn’t expect them to be used as they will be in Greece.

So for the French Bank Governor the markets are getting excited about nothing. Certainly the stories in August about France losing its AAA from S&P were all rubbish. The problem is how to solve this fundamental problem of making the EFSF bailout fund big enough to matter without it turning into a conduit of contagion from periphery to core. This is the absolute heart of the matter.

Can Greece default, and the EFSF bazooka be sufficiently big, without France losing its AAA? Noyer’s message is that it can be, because the French bank problem is “overstated”.

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