Over the past 48 hours we had heard pervasive rumors that at least one, maybe more, banks in Europe are on the verge of collapse. Our thought was, naturally, Dexia, which is the modern equivalent of AIG, not to mention the bank most rescued by none other than the Federal Reserve. Well, we were wrong. And if the Daily Mail is correct, the two banks about to kick the bucket are French SocGen and Italy's UniCredit. While the fact that these two banks are in trouble has not been lost on the market, which has been sending their CDS to near record highs, the speculation that they are far closer to implosion likely means that the equity value of the European banking sector is about to be decimated. As the News reports: "The merest hint a major bank might fall is likely to reignite panic tomorrow in the stock market, which is already feared to react badly to the credit downgrade of the U.S. by rating agency Standard & Poor’s." Well, it's now tomorrow.
More from the UK mag:
Fears are growing this weekend that two of Europe’s largest banks may require a bailout, having been hugely damaged by the worsening crisis across the eurozone.
In France, President Nicolas Sarkozy is having to confront the possibility that the country’s second-biggest bank, Societe Generale -commonly known as SocGen - is on the brink of disaster after huge losses over loans made to Greece.
The chilling possibility of the largest bank in Italy, UniCredit Banca, suffering a similar collapse if a bailout is not implemented comes as Silvio Berlusconi already faces an increasingly dangerous national economic situation.
Next up: bank runs.
In Britain, a senior Government source described the position of the two banks as ‘perilous’, although an official Treasury spokesman declined to comment. Should either bank collapse, British customers with deposits of up to about £85,000 would be protected by the Financial Services Compensation Scheme.
Naturally, no depositors will wait for this to happen, or for these news to be confirmed or denied. They will merely walk up to the teller window, submit a withdrawal ticket and proceed to close their accounts.
And here is where the story gets downright surreal:
David Cameron last night broke off from his holiday in Tuscany to talk to President Sarkozy about the crisis in the markets.
News of the planned talks emerged as Business Secretary Vince Cable appeared to back calls from China for the dollar to be eventually replaced as the main global reserve currency by a new international currency unit to be based around the IMF.
He said: ‘It would be a sensible way for the world to move but it’s not something to do overnight.’
But Mr Cable added: ‘In the short run, the U.S. dollar is the key international currency and although, frankly, the American legislators made a terrible mess of things a few weeks ago, they have now got back on track. They have undertaken to manage their debt in a prudent way.’
Remember where we said that the last thing left is for China to float the CNY? Well, pushing for the SDR is pretty much the same thing.
In the meantime, keep an eye on the price of Unicredit and SocGen tomorrow. Despite SocGen's and UniCredit's repeated statements that the article in Mail on Sunday was “false, irresponsible” the damage may have already been done. And something tells us the downside limits will be hit very quickly, leading to a Lehman-like self-fulfilling prophecy.
We wonder if in addition to PIIGS bonds, the ECB is ready and prepared to buy stocks of insolvent European banks...