The big French banks were nursing their wounds Thursday after a huge sell-off Wednesday afternoon.
Rumors that France might be the next major economy to lose its AAA credit rating, after the US was downgraded by Standard & Poor's late last week, helped drive European markets down Wednesday.
That happened despite the three major credit ratings issuing statements saying that France's rating was not at risk, and an S&P analyst saying publicly that France was doing a better job of tackling its debt problems than the US.
But one analyst says it wasn't fear of a French downgrade, but broader economic issues, that hit the bank stocks.
"People are shorting these stocks and pushing them down because of fear about the broader macro issues," Chris Wheeler, analyst at Mediobanca, told CNBC Thursday. "Nobody really listens to what analysts like me say."
The share price of Societe Generale fell by 15 percent Wednesday and was down as much as 8 percent on Thursday, despite the bank insisting that its exposure to struggling economies elsewhere in the euro zone did not threaten its stability.
In an interview with CNBC, chief executive Frederic Oudea insisted that Societe Generale has "limited exposure" to banks in Spain and Italy and is on pace to have enough capital set aside to meet Basel III solvency requirements by the end of 2013.
The bank has asked France's stock market regulator AMF to open an investigation into the source of the rumors, which hit its share price yesterday.
'Solidity in a Difficult Economic Environment'
Meanwhile, France's top banker firmly defended the country's banks following a two-day sell-off that has wiped billions of euros from their market value as investors fear over their exposure to European government debt.
The renewed bout of jitters Thursday have come despite assurances from policymakers and credit rating agencies and highlights the anxiety among investors over Europe's attempts to deal with its debt crisis.
The head of France's central bank Christian Noyer blamed "unfounded rumors" for the plunge in shares of the country's top banks, including Societe Generale and BNP Paribas, and said the country's financial institutions were sound.
In a statement, Noyer said that French banks' first-half earnings "confirmed their solidity in a difficult economic environment" and that the banks' capital cushions were healthy.
Volatile and nervous traders have ignored officials' repeated attempts to assuage their fears, and the stocks continued to drop in mid-afternoon trading.
Analysts were left grasping to identify a single trigger for the sudden reversal.
"There's nothing behind it, its a market of malintentioned speculators trading on pure rumors," said Marc Touati, an economist at French trading firm Assya Compagnie Financiere.
France has become the latest to be caught in the debt crisis crossfire afflicting Europe, and its government is taking pains to assure markets that it won't be the next to see its credit rating downgraded. French President Nicolas Sarkozy cut short his holiday Wednesday and ordered his ministers to come up with new budget cuts to ensure that France sticks to deficit-cutting targets.
However, his return did little to soothe investor worries about the country's rating even though all three leading credit rating agencies reaffirmed their current triple-A assessment of France.
"The market is in a phase of extreme volatility today so any news, even if it is not confirmed, is believed to be true," said Dominique Dequidt, fund manager at KBL Richelieu investment firm in Paris.
Effectively Shorting the Euro
BNP Paribas and Credit Agricole's share prices were also buffeted on Wednesday, and BNP Paribas took another hit on Thursday.
"I don't think insistences and denials ever do anything in terms of what the market thinks – you saw that in 2008," Chris Watling, chief executive of Longview Economics, told CNBC.
"We've yet to be convinced that Europe as a whole has put up a big enough package to solve the European fiscal crisis."
"Yesterday really felt like the latter part of 2008, where you were seeing the crisis moving from one bank to another," said Wheeler. "The one thing that could be dangerous is if it becomes a self-fulfilling prophecy."
The sell-off was partly caused by fears that contagion elsewhere in the euro zone could spread to France, the region's second-largest economy.
"People are effectively shorting the euro rather than banks," said Wheeler. "Long-term investors don't want to be in this space, and short-term movers are shorting for considerably shorter periods."
"People are shorting banks as a way of shorting sovereign debt," Tom Vosa, head of markets economics, Europe at National Australia Bank, told CNBC Thursday. "What we are really seeing is the markets deciding they don't like the fiscal position in Europe."
"The best way to get leverage and express that opinion is through shorting the banking system, because they know that the governments have to bail out the banks," he added.
French banks have so far performed relatively well during the credit crisis, as some of their counterparts in the UK, such as Royal Bank of Scotland, were part-nationalized.
"French banks have held up remarkably well. France's AAA rating has allowed them to fund themselves much more cheaply than, for example, their Italian or Spanish counterparts," said Wheeler.
"People are saying; 'Wait a minute, their capital position is weaker than Italian or British or Spanish banks!' And they're worried about that because they are going to be coming back to the market. The banks that stick out are the big three French banks, and Deutsche Bank."
There is increasing focus on banks' capital ratios ahead of the new Basel III regulations governing leverage ratios and capital requirements for banks, which are due to be fully implemented by 2018.
"There's clearly some concern that they need to address capital. If you look at their capital ratios compared to big US banks or European banks in 2012, they're sitting at 7.5-8 when other banks are at 10," said Wheeler, who believes that HSBC and Standard Chartered are the most secure financials because of their emerging market exposure.
While several other European banks have raised capital this year, ahead of the Basel III directives coming into force, and the banking stress tests earlier, the major French banks have so far avoided doing so.
Both SocGen and BNP raised capital in 2009 to repay the French government money for a bail-out during the credit crisis.
"We are beginning to see constraints on growth. Banks are finding that the cost of their raw material, cash, has gone up through regulation," said Vosa. "The best thing you could do in terms of regulation is give everyone a couple of years longer to get to Basel III."
- Reuters contributed to this report.
Yesterday, my colleague Louisa Bojesen made a mistake on air and we would like to make a correction:
She misquoted Reuters BreakingViews editor Peter Thal Larsen and mentioned that BNP Paribas’s exposure to Greek sovereign debt was 24 billion euros. This is incorrect. The correct figure is 2.3 billion euros.