Outlook: The fear of a new credit crunch could cause one

Frederic Oudea is furious about the treatment Société Générale has received over the past few days, as unsubstantiated gossip wiped 20 per cent or more off the value of his bank at times. He wants regulators to investigate.

One can understand the anger, but the fact the rumours did so much damage so fast to SocGen just underlines how perilously close we now are to a return of the credit crunch.

Why SocGen? Well, partly because it is French, and that country's sovereign debt is in focus right now. Partly because it has had one profits warning already this year. Partly because of the misinformed gossip. And partly because analysts say it has more short-term funding to roll over than many other European banks.

The latter factor is crucial, for the credit crunch was about liquidity rather than solvency. Northern Rock came unstuck because it was dependent on rolling over borrowings from month to month. When the availability of borrowing dried up, the bank very quickly ran out of cash.

No European bank today has the sort of exposure to the wholesale funding markets that did for Northern Rock. But banks do depend on functioning credit markets in order to resolve the conflict between the short-term nature of their liabilities – their customers' deposits – and the long-term profile of their assets – the loans they have made. If credit markets stop functioning, that conflict becomes harder to manage.

We are not in that position yet. But the spike in overnight lending to banks revealed by the European Central Bank yesterday suggests that many eurozone institutions are now finding their funding lines more difficult – or expensive – to access.

What will really worry Mr Oudea is that in these market conditions, gossip, however misinformed, can become self-fulfilling. Rumours that a bank has a funding difficulty prompt other lenders to withdraw credit and the market freezes up before the rumours can be disproved. "People are scared," Mr Oudea told French radio yesterday. That is the problem.

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It is hugely welcome that home repossessions are falling rather than rising, despite the crunch on household incomes we have seen during the first half of this year.

We should not be complacent, however. For one thing, the banks' policy of forbearance stores up trouble for the future. For another, historically low interest rates, which have kept the cost of mortgages down, cannot stay at this level forever.

In the past, repossessions have always spiked up during recessions and receded as the economy has recovered. This time around, that profile is set to be reversed.