Gold price hits $1,800 as French banks head south

That's off the back of more panic in the markets yesterday, as France's SocGen became the focus of speculation over the country's credit rating.

by Emma Haslett
Last Updated: 06 Sep 2011

It seems gold’s allure knows no bounds at the moment: this morning, its price hit $1,800 for the first time after the markets continued to yo-yo yesterday. Traders spent the first half of the week worrying about the effects of various debt crises on US, Spain and Italy; yesterday, they turned their attentions to France, Europe’s second-largest economy, where there were concerns its banks were too exposed to sovereign debt. But while things were somewhat calmer this morning, there’s no indication it won’t happen all over again tomorrow...

Yesterday’s panic centred around French bank Société Générale, after rumours spread around trading floors that, having bought up sovereign debt from weaker Eurozone economies,  it had exposed itself (and the French economy) to a potential credit rating downgrade. At one point, its shares plummeted by 20%. It took SocGen’s CEO Frederic Oudea to appear on CNBC to reassure investors that the bank would be fine - plus an affirmation by all three of the main credit ratings agencies that France’s AAA status is safe, to calm things. (Although as the FT’s Lex column put it this morning ‘Like the highest grade in a British school, AAA isn’t what it used to be.’)

But despite the less frenzied atmosphere, there are suggestions that investors are still nervous. Five-year credit default swaps on France’s debt (essentially the cost of insuring loans to it) have risen four basis points to 175bp - the more it rises, the more risky investors feel loans to the country are.

Of course, from a British point of view, it’s hard not to feel a touch of schadenfreude (or whatever the Gallic equivalent of that is), given the smug way the French reacted during the run on UK banks back in 2008. Then, it was kicked off by subprime debt: this time, by sovereign debt, but as the French are discovering the hard way, the effects are much the same. But the worry is that even though we’re not part of the Euro, any financial turmoil across the channel would still have a heavy impact over here. You only need to look at the FTSE 100 this morning, which still hasn’t recouped all of yesterday’s losses: having closed 3% down yesterday, it’s so far only managed to rally by 2%.

The worrying thing is that, with all the to-ing and fro-ing in the markets, the atmosphere is becoming more and more like that of summer 2008. And, as the BBC’s Robert Peston points out in his blog, with with so many beleaguered economies under pressure from their benefactors (mainly  Germany) to introduce stringent austerity measures and reduce their deficit, investors and lenders are becoming increasingly worried that ‘the risk of a slide back into recession has become larger’. And, as we saw yesterday, there’s nothing more likely to send markets into a spin than a healthy dose of fear...

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