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French bank seeks probe into stock selloff

By Greg Keller

Associated Press

Published: Thursday, Aug. 11 2011 4:25 a.m. MDT

A broker speaks on the phone in a trading room in Paris, Wednesday, Aug. 10, 2011. Worries over the debt problems afflicting a number of European countries as well as the U.S. have knocked confidence over the global economic recovery and triggered turmoil in financial markets around the world.

Jacques Brinon, Associated Press

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PARIS — French banking stocks resumed their precipitous decline Thursday a day after rumors about Societe Generale's financial health prompted another bout of turmoil in the financial markets and reinforced the skepticism over Europe's ability to deal with its debt crisis.

After a brief rebound in early trading, BNP Paribas and Societe Generale continued to lose ground. Both were trading around 5 percent lower by midday as government and rating agency assurances did little to assuage investor fears over banks' health.

France has become the latest to be caught in the crossfire and its government is taking pains to assure markets that it won't be the next to see its credit rating downgraded. French President Nicolas Sarkozy cut short his holiday Wednesday and ordered his ministers to come up with new budget cuts to ensure that France sticks to deficit-cutting targets.

However, his return did little to soothe investor worries about the country's rating even though all three leading credit rating agencies reaffirmed their current triple-A assessment of France.

"The market is in a phase of extreme volatility today so any news, even if it is not confirmed, is believed to be true," said Dominique Dequidt, fund manager at KBL Richelieu investment firm in Paris.

Societe Generale, France's second biggest bank, bore the brunt of Wednesday's market skepticism as its share price became a massive victim of rumors surrounding its financial health.

In light of the turmoil, which saw the bank's share price drop nearly 15 percent Wednesday, the bank has asked the French market regulator, the AMF, to investigate the rumors that it was on the ropes because of its heavy exposure to debt from troubled eurozone economies.

Societe Generale CEO Frederic Oudea on Thursday called the rumors "totally unfounded" and "irrational." Speaking on France-Info radio, he urged calm and insisted that the bank's fundamentals are sound.

KBL Richelieu's Dequidt warned that the rebound in banks' share prices "remains very fragile, fragile to rumors, fragile to the volatility."

Oudea said Societe Generale had already accounted for its exposure to Greece's debts in its second quarter earnings.

"We are in an extremely nervous market, extremely volatile," he said.

Worries that France would lose its coveted triple-A credit rating sparked Wednesday's selloff, which built momentum on rumors over Societe Generale

"S&P is not going to downgrade France any time soon. Nor are Moody's or Fitch," Gary Jenkins of Evolution Securities said. "Growth will be the key to the stability of the ratings for France, U.K and the U.S. over the next 12 months."

He said there will be extra attention to France's release of second-quarter GDP figures on Friday, and warned that France could suffer if it has to spend significant new money to bail out more struggling eurozone states.

France's growth prospects are considerably better than those of Italy and Spain's, but its economic expansion is slowing and it's failed for years to reduce a deficit that stood at 7.1 percent last year. No other eurozone economy with a triple-A rating has a higher debt than France's — around 85 percent of national income.

The government is already aiming for a deficit of 5.7 percent of national income this year and 4.6 percent in 2012, goals that analysts increasingly see as unrealistic.

Sarkozy said he's asked Baroin to prepare a list of measures to guarantee the government attains its deficit-reduction targets. Sarkozy will take a decision on which measures to implement at an Aug. 24 meeting with his prime minister, budget minister and Baroin.

One analyst described these measures as "defensive action" by the government. "The French government is aware that the market is lining up France as the next domino in the sovereign debt crisis," said Jane Foley, senior currency strategist at Rabobank in London.

Adding to market worries, French presidential elections scheduled for the spring of 2012 may make it difficult for the government to implement further austerity measures at a time when the economy is slowing.

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