French Banks Dangerously Exposed to Public Debt

A very interesting review by Éric Dor, Chief Economist at IESEG, summarizing the exposure of French and European banks to French debt. French banks are naturally in first place, with very high levels of exposure. In the event of a debt crisis, i.e., if the French government were unable to finance itself, the value of these assets would plummet, instantly putting these banking establishments at risk, if not bankrupt.

As the economist notes: “It is absolutely necessary to prevent any depreciation in the value of public bonds issued by France, to avoid losses for the banks and thus protect the deposits of the population, both in France and abroad. Control public debt for the collective interest!”

An amount of less than 5 billion euros may be considered manageable, but some European banks would still have a lot to lose, such as Italy's Intesa Sanpaolo, which has almost 10 billion euros of French debt on its balance sheet.

The BPCE group (Banques Populaires, Caisse d'Epargne, Natixis) holds 182 billion euros of French debt, a gigantic amount that reflects an inability to diversify its assets, a fundamental skill for a banker, it seems. It also reflects the group's inability to do its job of financing the economy: what's the point of collecting savings if you're going to invest them in Treasury bonds? We might as well allow the French to buy them directly, which would save on the operating costs of this banking structure! Above all, this reflects what is known as the “crowding-out effect”, when the State captures savings to the detriment of companies and the productive economy. This is another reason why French growth is anemic.

With half as much, around 90 billion euros, the Banque Postale comes second. Controlled de facto by the government, it helps to recycle its debt. Logical. Crédit Agricole (including LCL, formerly Crédit Lyonnais) follows close behind with 82 billion euros, a debt likely to take it down. Next come BNP Paribas and Société Générale, with around 40 billion euros each, still a significant level.

Crédit Mutuel comes last, with a surprisingly low figure of only around 15 billion euros. But that's a good thing: when I'm asked which French bank is the least risky, I say Crédit Mutuel. It doesn't have a market bank likely to suffer heavy losses, and the volume of French debt it holds would remain absorbable in the event of a crisis.

If banks hold so much government debt, it's largely out of legal obligation, and that's the perversity of the Western banking system. In fact, the Basel III accords are imposed on G20 countries, obliging their banks to hold sovereign bonds, considered “safe”, as guarantors of their balance sheets and their clients' deposits. States' debts are deemed solid, based on the idea that they will never go bankrupt... until such time as the country can no longer repay its debt and defaults. The value of its debt then falls to zero. This kind of event has happened before: Mexico in 1982, Russia in 1998 (which led to the bankruptcy of the LTCM fund and almost caused a global banking crisis), Argentina in 2001. And even if the banks wanted to buy several dozen tons of gold, which would be much smarter, they can't, because gold is considered risky. They would have to block cash in return, which would ultimately prove too costly. This is how our incestuous system between governments and banks works...

But let's return to our table to look at two other French financial institutions. Bpifrance is supposed to finance startups, but it actually holds 18.5 billion euros of French debt. A huge, unjustifiable amount. Worse still are the 45 billion euros held by SFIL, the Société de financement local, which is dedicated to financing the local public sector, but which in reality mainly finances the central government! The weight of these two institutions reflects a difficulty in finding clients for French debt, or at least a desire not to depend too heavily on foreign sources. As a result, the government is creating two washing machines...

In short, if France defaults on its debt, you won't be able to cut out the BRRD directive (bank account seizures by failing banks).