European debt twilight zone claims Société Générale

Markets turn against French banks in general - and SG in particular - on a day short on solid news and long on rumours

Against a backdrop of rumoured impending downgrades for French debt, credit default swap (CDS) spreads on Société Générale widened dramatically today, with much of the volatility occurring in the afternoon session of London trading.

The bank's five-year CDS spread ended yesterday at 270 basis points but the intra-day ask had reached 313bp by 3.11pm UK time. Just 19 minutes later at 3.30pm the ask had shot up to 362bp, according to data from Markit. Between the start of trading and that mid-afternoon peak, the bid-ask spread for Société Générale more than tripled, from 7.5bp to 26.7bp. The bank has issued a statement denying "all market rumours".

Concern has also spread to other French banks – spreads on BNP Paribas moved up from 213bp at close of play yesterday to a bid-ask mid-point of 260bp by 3.30pm today, while in the same period Credit Agricole rose from 241bp to a mid-point of 260bp.

All three firms also took a tumble in the stock market. By 4pm UK time, shares in Société Générale had fallen to just under €21, from €27 at the start of the day. In the same period, BNP Paribas had dropped from €40 to €36, and Credit Agricole moved from €7 to €6.

"I'm watching my employer's stock price getting smashed. It's not looking good," said a senior trader at one of the large French banks, speaking halfway through the afternoon session. He declined to speculate what was driving the market, but noted that the other French banks were also suffering.

Meanwhile, CDS spreads for the five major US banks narrowed today, after widening dramatically on Monday and Tuesday this week.

"The big moves in bank CDSs we saw on Monday were part of a market-wide risk-off feeling in reaction to Friday's downgrade of the US credit rating, and the worsening economic picture overall," says John Guarnera, a credit strategist with Société Générale in New York.

Standard & Poor's announced its downgrade of the US credit rating from AAA to AA+ on Friday, helping spark a 100bp surge in Bank of America CDS spreads – and less-severe widening at the other big US names – by mid-morning London time on Tuesday. However, Guarnera says the debt downgrade shouldn't have a lasting impact on assessments of US bank credit risk.

"The risk-off trade wasn't specific to financials, it happened across the market. Monday's moves highlighted how jittery the markets are, rather than any danger to the banks from the downgrade" he says. "US Treasuries rallied on Monday, despite the downgrade, and not much has changed with respect to how Treasuries and federal agency securities will be risk-weighted, so it's no more expensive for banks to hold these instruments."

Other analysts echo this view. "For quite some time in equities and credit, people have been short European banks and long US banks. Therefore, the shock was pretty severe for these people. That helps justify some of the moves as people have been scrambling to reduce or hedge their long positions in US banks," says Matt King, managing director of credit products strategy at Citigroup in London. "However, the spike in spreads among the US banks was overdone, and that is one of the reasons they're coming back in, though the likelihood of slower growth will probably prevent spreads from rallying back all the way," he adds.