“Just keep smiling, Nico….”

Top banker tells Slog: “It’s now all about what the stress tests never tell you”

French bank stock prices took a pasting this morning as Moody’s signalled it may downgrade one or all of them. The situation wasn’t helped by Greek Deputy Finance Minister  Filippos Sachinidis’s statement that the country has only a few more weeks of cash left. And in an exclusive interview, a top EU-based banker has told The Slog, “there will be big surprises about which banks fall” – and singled out Germany’s Landesbanks as a serious potential problem.

“We have maneouvering space in October,” Filippos Sachinidis said in an interview on Greek television, “We are trying to make sure the state can continue to operate without problems.”  Troika lenders have threatened not to pay the sixth bailout tranche of 8 billion euros following backsliding: but the Deputy Minister’s statement makes it clear that Athens can’t survive without the money. They are already in default  – and nobody seems to know if they have been given the money yet – but as each day passes, such minor details appear less and less important.

Meanwhile, Moody’s has hinted at credit down-ratings on major French banks;  BNP Paribas was down 12.5%, Credit Agricole fell a whopping 14%, and Societe Generale too fell 12.5%. Huge Italian outfit Unicredit saw falls of such catastrophic velocity, shares in it were suspended.

SocGen is becoming the experts’ favourite to fail. Aware of the rumours, the Board this morning promised to speed up asset disposals and cut costs,  but the total amount involved in that operation is probably well below €10bn. That is never going to be the difference between survival and collapse.
In this context, last night The Slog gained exclusive access to a top EU-based banker personally involved in the sovereign credit sector (not French) who gave the site his frank appraisal of the eurozone situation – on condition of complete anonymity.
“What’s going to happen now,” he began, “is we’ll see what’s either been hidden or missed during the stress tests. The fact is, sovereign debt is many-headed and various. It comes in all shapes and sizes, and it’s easy to hide or even innocently miss. If you’re an investigator, it can be a bitch to find”.
Asked about likely eurozone banking failures, the Slog’s source had this to say:
“There may be some clues from the way the German leaders are behaving right now. There are plenty of real estate outfits tied to Landesbanks in Germany. These two-bit companies are guaranteed by the German State. They and the Landesbanks also have huge exposures to Greek and Spanish debt. Now this is real money – not bonds and so forth. These little guys go down, and Berlin has to pay out real, unbudgeted cash to those who lose. This makes it a whole different game for the Government.”
Of the French banks, he added: “On a Greek default alone, no sensible major should be blown over. SocGen is an exception in that it owns a pretty third-rate Greek bank and nobody knows what sort of stuff is in there. But like I say, it’s about what we don’t know. I can show you a set of books tomorrow with so-called debt exposure: but that won’t show up what other collateral and derivative bits there might be in there. You get told by a national bank they’ve bought so-and-so off the Government and you think, OK. Then you realise that attached to the deal is a further commitment that dwarfs the apparent liability. There will be surprises – for sure. There always are.”
SocGen’s body language at the moment smells to me of a seriously unpleasant problem in the mix somewhere. And on a higher level, Lagarde’s panic-button speech at Jackson Hole suggests strongly that there are cans full of wriggling worms we don’t know about. Finally, the truth is that we aren’t just dealing with one likely default.
In this quicksand-ridden landscape, it’s good to know that the folks in charge have the whole area mapped out. In a report issued yesterday, the European Commission said that EU states must take further measures to decrease the economic bloc’s debt levels, adding that ‘policy differentiation is appropriate across member states depending on “available fiscal space”.’ There’s a few minutes of the ninety left, and the Brussels Sprouts are still conducting the Community Singing. I think ‘Abide with Me’ might be appropriate.