Tuesday, September 20, 2011

Bank woes could stymie France's recovery

A French banking system shaken by a crisis of confidence and hobbled by the need to deleverage and write down assets could choke off credit to consumers and businesses and shatter France's fragile recovery.

France's economy was already stuttering, with zero growth in the second quarter, before alarm over its banks' exposure to Greece and their reliance on short-term wholesale funding battered banking sector share prices and jolted global markets.

Buffeted by a Moody's downgrade of Societe General and Credit Agricole, and the increasing unwillingness of U.S. money market funds to lend dollars to fund their short-term operations, France's banking sector now seems set for a period of retrenchment.

While an agreement among central banks last week to offer three-month U.S. dollar loans to commercial banks staved off fears of Europe's money markets freezing, as they did during the 2008 credit crunch, Bank of France Governor Christian Noyer warned that French banks would have to shrink their balance sheets to adjust to tougher funding conditions. more