Investors and analysts who think a government bailout for the troubled French banking sector is increasingly likely are focusing on what form any aid could take, even as banks continue to deny they need state help.
The possibility of a bailout jumped from speculation to something much more concrete at the weekend after Bank of France Chairman Christian Noyer said in an interview that a support mechanism set up in 2008 could be used to shore up banks' capital in case of an extraordinary event.
On Monday, at least five different analyst research notes discussed the increasing likelihood of a government move to inject capital into BNP Paribas, Societe Generale and Credit Agricole.
We believe the longer the crisis continues, the greater the likelihood that the French government will opt for some form of market 'shock therapy' to reintroduce confidence in the French banks' viability, said HSBC analysts in one.
All three banks surged on Monday, tracking a broader rally in European banks, whose shares have been hammered in recent months. Societe Generale, for example, had lost 57 percent in the three months through Friday, while Credit Agricole was down 55 percent over the same period.
The sentiment that the (French) state is there to support the banks if needed explains the rebound even if the banks say they have no need for it, said Frederic Rozier, a fund manager at Meeschaert Asset Management.
All three banks have continued to deny that any bailout is needed or being planned, but as Nomura analyst Jon Peace said in a research note on Monday, there were also strenuous denials in 2008 until just days before the French government moved in with a recapitalization plan.
At the time, with financial markets rattled by the collapse of Lehman Brothers, the French state made available 360 billion euros ($487 billion) for the banks, 40 billion of which was for strengthening their capital base, while another 320 billion helped them refinance via a public entity called the SFEF.
Several banking sources have said they had heard private rumblings that a state injection of preference shares -- interest-bearing instruments half-way between debt and equity -- was being discussed, though how concretely was unclear.
Preference shares give more flexibility to design it in the way they want, said one Paris-based banker late last week, adding that the government would need to pull the trigger at the right time.
You can only do that when you are really at the bottom, he said, noting that otherwise further share declines could undermine the confidence boost provided by the intervention.
Assya economist Marc Touati pointed to a potential political hurdle too: Will France do this unilaterally without Europe?
In the government's last rescue after the 2008 financial crisis, the banks raised capital by selling preferred shares that were not convertible into ordinary shares.
BNP Paribas sold 5.1 billion euros' worth and Societe Generale raised 3.4 billion from the government.
To be effective in 2011 to reduce concerns about euro zone default, we believe much higher amounts would be needed, Nomura's Peace wrote.
Some form of injection that does not involve common shares is likely because the French government does not want to get involved in day-to-day management decisions at the banks, RBS analysts wrote in a note.
That said, there may well be political pressure in some French quarters to consider common equity injections, they added.
Touati said France did not have the means to take direct stakes in its banks. It would be a risk to its AAA (rating) and would also only serve to bulge the government's debt pile.
Assuming common equity is not involved, and preference shares or some kind of subordinated debt are used, the French government would likely reap a healthy return; the preferred shares issued after the 2008 crisis paid an 8 percent coupon.
BNP Paribas and Societe Generale would clearly like to avoid state intervention and to that end have both announced plans to unload tens of billions of assets to free up capital.
'LIQUIDITY SUPPORT' EYED
Another form of intervention that would fall short of a capital injection would be some form of liquidity support in which the government would provide guarantees for senior debt, similar to those provided by the 2008 SFEF facility.
Still, any kind of French move to revive its banks could fall short given euro zone strains hitting funding conditions.
European officials are focusing on ways to beef up their existing 440 billion-euro rescue fund following a weekend of meetings in Washington, D.C. But deep differences remain over whether the European Central Bank should commit more resources to shoring up banks and help struggling euro zone states.
Investors fear if Greece's problems spread to Spain, Italy and elsewhere it will require Europe's bailout fund to be bloated to around 2 trillion euros and it would need well over 100 billion euros of extra capital to be pumped into banks.
Euro zone banks would require a minimum of 112 billion euros of capital if they took losses on sovereign bonds and assuming no macroeconomic deterioration, said Kian Abouhossein, analyst at JPMorgan. To create a cushion, 150 billion euros is a more likely scenario, he said.
(Additional reporting by Lionel Laurent, Juliette Rouillon, Sophie Sassard, Nicholas Vinocur and Steve Slater; Editing by Helen Massy-Beresford)