Societe Generale Debt Crisis
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Societe Generale: In midst of sovereign debt crises
Ravi Shankar Pandey
(Societe Generale-FULL YEAR AND 4th quarter - 2013 results, 2014)
Due to the global financial crisis of 2008, the major countries of the OECD implemented economic stimulus plans that increased their public debt levels and deteriorated public finances. It also led to eurozone debt crisis and Greek debt crisis. The European debt crisis was multi-year debt crisis erupted in several Eurozone countries at the end of 2009. It was characterized by environment of high governmental structural deficits and accelerating debt levels.
In January 2008, the bank faced a loss of €4.9 billion (equivalent to US$ 7.2 billion) due to fraudulent transaction by single future trader. The future trader allegedly orchestrated series of bogus transactions that spiralled out of control amid volatile market in 2007 and early 2008. This led to two credit rating agencies reduced the bank’s long term debt ratings from AA to AA- (Fitch) and Aa1/B to Aa2/B- (Moody).
Société Générale is facing the problem of financing needs and is now wondering how to attract a large base of investors over the long run to maintain its finance conditions that are compatible with the sustainability of their public debt. France current account balance has worsened drastically over the last ten years. Also the deterioration in the external current account balance reflects the drop in the national economy’s position of the lending. France’s public deficit shot up as the income fell sharply because of the poor economic environment and authorities’ implementation of the stimulus plan. Households increased their savings by one point over the year and significantly reduced their investment spending.
Société Générale, France's second largest banking group generating more than EUR 2.5 billion from assets of nearly EUR 25 billion concentrates on asset management, private banking services, retail bank services and corporate and investment banking operations.
When France was in the midst of an industrial revolution in 1864, Joseph Schneider along with a group of private Paris bankers formed Société pour Favoriser. Société Générale was both a deposit bank and an investment bank in the beginning but it grew rapidly by establishing regional banks all over France and by investing in metals yielding large profits.
In December 1945, Société Générale, was nationalized and stockholders were duly bought out by the government, and thus became a state-controlled bank.
After WWII, there was also a trend toward international expansion. By 1955 it had 35 branches spread throughout Algeria and in several foreign countries. Société Générale was one of the first to begin dealing in euro currencies. (Societe Generale, 2014)
After the liberalization of the French banking system in 1966, Société Generale started expanding its individual customer base. Fully owned by the French state after its second nationalization, the Bank returned to the private sector in 1987. Société Generale acquired a network of regional banks in 1997 that enabled it to step up its retail banking activities.
Société Générale universal banking model is based on their complementary businesses in France and other parts of the world. Their expertise in areas such as corporate and investment banking, retail banking, insurance, financial services, private banking and asset management helps them to meet all their customers' diversified needs.
Société Générale universal banking model if consolidated comprises mainly of three core businesses:
- Retail banking in France: with the Société Generale branch network, Credit du Nord and Boursorama. It offers a comprehensive range of multichannel financial services with the leading edge of digital innovation;
- International retail banking, insurance and financial services: with a presence in different emerging economies and leading specialised businesses;
- Private banking, Investment and corporate banking, securities services and asset management,with recognised expertise, integrated solutions and top international rankings.
Expertise area (Products/ Services): retail banking, investment and corporate banking, insurance, financial services, private banking and asset management. To investors Societe Generale provides a complete range of investment offering such as, vanilla OTC products, funds and tailor made structured solutions -with global insight, first-class capabilities, and cross-asset advisory.
(Duprat Marie-Hélène, september - 2014), (DEVELOPED COUNTRIES: WHO HOLDS PUBLIC DEBT?, 2013)
Competitors - BNP Paribas bank, Credit du Nord, Natixis, a group of regional banks; and Boursorama, France’s leading online bank.
Customers - over 11 million individual customers and nearly 615,000 professionals and businesses.
Suppliers - SMEs, multinational firms, individual public etc.
External economic environment - It is facing many challenges like Greek/eurozone debt crisis and public debt negotiation, European central bank evaluation of banks to create a banking union, ECBs new asset purchase program, high current account deficit of French government, tightening of regulatory capital requirements, monetary policies like quantitative easing, credit easing and managing market players expectations by lowering long term rates.
Greek debt crisis
(Eurogroup statement on Greece, 2014)
SocGen owns 88 percent of Athens-based Geniki Bank SA - - whose stock price is declining, and which held 2.5 billion euros of Greek debt (in year 2011). So a default by Greece would cause major problem for Société Generale. Greece's new government is asking for debt relief. (€320 billion at the end of 2014)
SocGen needs to persuade European creditors to allow a rescheduling of Greek debt. Greece has to reach an agreement with its creditors and secure $7bn to meet its financing needs for 2015. If no agreement is reached, the government, which does not have access to the international financial markets, could default.
Sovereign debt crisis
(Ricardo Correa, 2014, May)
Several countries have issues debt in the form of bonds issued by a country's public treasury, credit from banks or government institutions etc. Examples:
- Greece: 175% of GDP in 2013 (compared to 103% in 2007)
- Spain: 92% of GDP (nearly tripled since 2007)
- Italy: 128% of GDP (compared to 100% in 2007)
- France: 92% of GDP (compared to 64% in 2007)
ECB evaluation of banks:
The European Central Bank now evaluates banks Assets Quality and conducts Stress Tests and tries to manage more effectively any potential bank failure. It has led SocGen to speed up the process of cleaning up its balance sheets and adapt to single supervision mechanism.
New ECB plan
ECB announced asset purchase which will amount to €60 billion per month from March 2015 to September 2016. This quantitative easing can put pressure on SocGen to reduce interest rates. Also, excess supply of euros, and negative interest rate (-0.2%) for the excess cash deposited at ECB, will encourage investment of capital in other currencies, mainly dollars to achieve more attractive yields. So euro/US dollar exchange rate has fallen. However, euro will not significantly depreciate compared with other currencies than the dollar, as some Central Banks are implementing monetary policies that are as aggressive as the ECB's policy (Japan), or because some countries (emerging markets) are facing a net decline in their macro-economic position.
In France, Prudential Supervisory and Resolution Authority (ACPR) took on the role of supervisor for banking sector. A single supervisory mechanism headed by the European Central Bank (ECB) was introduced for the euro zone as from November 2014.
Basel 3” framework
The G20 leaders implemented the “Basel 3” framework, established in 2010 by the Basel Committee which defines new solvency and liquidity standards for banks. Due to this SocGen, had to modify its balance sheet mix to include lower-risk and more liquid assets. It also needs to ensure that it gathers a larger amount of deposits in order to continue playing its role as lender.
(DEVELOPED COUNTRIES: WHO HOLDS PUBLIC DEBT?, 2013)
- Debt to GDP ratio: It is the ratio of what country owes to what it produces. When expressed in percentage, the ratio can be interpreted as the number of years required to pay back debt if entire GDP is dedicated for repayment. France has sovereign debt loads- 92% of GDP (compared to 64% in 2007)
- ECB monetary policy in terms of expansionary or contractionary monetary policy, interest rate changes, debt swaps, open market operations, buying government and private debt securities, asset purchasing.
- French government fiscal policy in terms of fiscal stimulus, Fiscal consolidation, fiscal austerity.
- Balance of payment crisis: This unequal flow of currency reduces supply of money in nation and cause an increase in exchange rate relative to currencies of other countries.
- Structural deficit: It results due to persisting budget deficit that results from a fundamental imbalance in government receipts and expenditures.
- Economic stagnation: A prolonged period of long or no economic growth generally less than 2-3% annually.
- Exchange Rate- Low interest rate by ECB has led to fall in euro/dollar exchange rate as investors are investing in US.
- Stock market crashes: Rapid and often unanticipated drop in prices of stock which can be the result of major catastrophic events, economic crisis/collapse of long term speculative bubble.
Crucial questions arising out of the case:
- How Societe Generale will be able to continue attracting investors and what it should do to improve its financial condition?
It is important for Societe Generale to attract investors because of significant financing needs in the long run. Thus, some of the ways in which Societe Generale can continue attracting investors can be seen as follows:
- Increase in client base – The growth of the business can be done with the corporates through spreading out of high net worth individual base in Europe.
- More of resources should be diverted into the enhancement of the Financing & Advisory business through allocation of more capital and the use of long term funding capabilities.
- Should identify and construct its strength in the marketing activities by strengthening of leadership position in flow equity derivatives and here a considerable potential remains through opening out in Germany, Asia and the US.
- To increase the annual revenue growth, bank should focus to be on the forefront of the post-trade services revolution and thereby improve the fund administration platform.
- Can ECB extend their support to Societe Generale to improve its financial conditions?
Yes, ECB can extend support to Societe Generalebank by providing abundant liquidity to make sure the bank remains liquid in other currencies. It can lower the cost of dollar currency swaps. It can also reduce the bank rate which can lead to fall in euro in relation with other currencies increasing export.
- What can be the implications of French government fiscal policy and ECB interest rates on Societe Generale? (Fiscal policy, public debt and monetary policiec in the emerging market economies, 2012)
Quantitative easing by ECB and contractionary fiscal policy can reduce interest rates and cause investors to invest in other currencies. So, the bank will find it hard to attract investors. Also euro/US dollar exchange rate will fall.
- What could be the implications of Greek debt negotiations and demand for debt relief on Société Generale?
The implications of Greek debt negotiations and demand for relief on Société Generale can be seen as follows:
- It can decrease its stock/share price and market value.
- It can cause credit loss and decline profits.
- It can enhance the risks involved in credits given and investments made. (AGABRIEL, 2014)
- AGABRIEL, H. (2014). Societe Generale-KEEPING THE PACE OF TRANSFORMATION TO DELIVER SUSTAINABLE GROWTH.
- (2013). DEVELOPED COUNTRIES: WHO HOLDS PUBLIC DEBT? Societe Generale.
- DupratMarie-Hélène. (september - 2014). Eurozone: is the crisis over?
- (2014). Eurogroup statement on Greece. Brussels.
- (2012). Fiscal policy, public debt and monetary policiec in the emerging market economies. monetary and economic department.
- Ricardo Correa, H. S. (2014, may). Sovereign Debt Crises.
- Societe Generale. (2014). OUR HISTORY.
- (2014). Societe Generale-FULL YEAR AND 4th quarter - 2013 results. Societe Generale.
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