Rumours drive Société Générale CDS wider for second straight day

CDS spreads on SocGen continue to rise - with no obvious driving force - while share prices of the three major French banks fall

After being throttled by eurozone debt crisis fears yesterday, Société Générale (SG) has found itself in an even tighter stranglehold today - risk perceptions of the bank have risen again, and its stock continues to fall on equity markets.

Having started yesterday at 274 basis points, five-year credit default swap (CDS) spreads on SG had shot up to 334bp by the end of trading. The firm's pain has continued today. By 12.15pm UK time today, the bid price for SG CDS had jumped to 358bp, with the ask price a full 20bp wider at 378bp, according to data from Markit.

The driving factors behind this spike remain unclear. Rumours of an imminent French sovereign downgrade have swirled in recent days, but Moody's Investors Service, Fitch Ratings and Standard & Poors all confirmed yesterday that they regard France as a AAA credit with a stable outlook. SG, along with its major French rivals BNP Paribas and Crédit Agricole, has significant exposures to sovereign debt in the eurozone's imperilled periphery, but this has been common knowledge in the market for some time. SG yesterday denied "all market rumours" and asked French regulators to investigate.

An alternative explanation could be a lack of liquidity in SG CDS themselves - isolated, large trades might have driven spreads higher - but Markit classes the bank in its most liquid category of single-name contracts, with an average of 11 different dealers quoting SG CDS at least once a day. According to data collected by the Depository Trust & Clearing Corporation (DTCC), which runs a warehouse of CDS data, 88 SG CDS contracts traded last week, making it the 54th most liquid of the 1000 top single-names.

BNP Paribas and Credit Agricole also saw steep rises in their CDS spreads yesterday, but have both enjoyed a comparatively quieter day today - although the bid-ask spreads on each are roughly as wide as the 20bp spread for SG. BNP Paribas CDS finished yesterday at 237bp, and at 12.15pm UK time today the ask price sat at 255bp. Crédit Agricole narrowed from 279bp at yesterday's close to an ask price of 278bp today.

All three banks saw their equity market value drop. SG fell from €24 at 9am to €22 at 3pm. BNP Paribas moved from €36.50 to €34.50, while Credit Agricole fell slightly from €6.50 to €6.

French sovereign CDS, which was the most active single-name in the market by notional last week, according to the DTCC, also widened today, moving from 174bp at close of play yesterday to 181bp by 12.15pm today.