El-Erian: French Banks' Troubles are the Flame Near the Gas Can
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PIMCO's Mohamed El-Erian made statements regarding French banks in the Financial Times earlier Thursday.
Basically, he believes the French banks -- like BNP Paribas and Societe Generale -- may tip Europe into a full-blown financial crisis.
Institutions around the world have been lessen their lending to French banks, El-Erian contends. Risk of default for the banks is now indicative of a double-B rating, thanks in part to credit markets. El-Erian further states bank equity is now trading a a 50 percent discount to tangible book value on average. French banks' ratio of market capita to tangible assets is down to 1.0 to 1.5 percent, compared with 6 to 8 percent for healthy banks.
The banks would then need to deliver their balance sheets in a "very drastic and disorderly fashion." Institutional investors would make exits, and edgy retail investors would be tempted to follow, says El-Erian.
But neither the banks nor authorities have done enough to even stop the trend, much less reverse it. The ECB stepped in to offset the liquidity crunch, but capital cushions and assets quality have gone unaddressed.
El-Erian proposes three measures authorities and banks can work with the ECB on to address the issues:
Basically, he believes the French banks -- like BNP Paribas and Societe Generale -- may tip Europe into a full-blown financial crisis.
Institutions around the world have been lessen their lending to French banks, El-Erian contends. Risk of default for the banks is now indicative of a double-B rating, thanks in part to credit markets. El-Erian further states bank equity is now trading a a 50 percent discount to tangible book value on average. French banks' ratio of market capita to tangible assets is down to 1.0 to 1.5 percent, compared with 6 to 8 percent for healthy banks.
The banks would then need to deliver their balance sheets in a "very drastic and disorderly fashion." Institutional investors would make exits, and edgy retail investors would be tempted to follow, says El-Erian.
But neither the banks nor authorities have done enough to even stop the trend, much less reverse it. The ECB stepped in to offset the liquidity crunch, but capital cushions and assets quality have gone unaddressed.
El-Erian proposes three measures authorities and banks can work with the ECB on to address the issues:
- Inject capital through public-private partnerships, including TARP-like mechanisms;
- Realistically assess the asset side of the balance sheet; and
- enhance depositor protection.
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