Societe Generale said it would cut costs and sell assets to free up 4 billion euros in fresh capital on Monday, although the surprise move failed to stem a sell-off in French bank shares, driven by fears of a Greek debt default.

A rapid decline in French bank stock prices since the beginning of the summer has led to speculation that the French state may have to intervene and recapitalize its banks, in the same way as the British and other governments were forced to during the first wave of the financial crisis.

BNP Paribas led the falls, with its shares down 13.5 percent, while SocGen and Credit Agricole were both more than 9 percent lower at 1224 GMT. They are trading at levels not seen since at least early 2009, when recession stalked much of the developed world.

Although SocGen Chief Frederic Oudea promised fresh asset sales, cost cuts and staff reductions in a bid to fight what he called extreme volatility on financial markets, some investors said it mattered little in the current context.

The plan remains of minor interest as long as SocGen is caught in this spiral of negativity on financials, said Yohan Salleron, fund manager at Mandarine Gestion. Banks' own announcements are fading into the background.

It smells of 2008, 2009, a London-based bank analyst said. The market is increasingly pricing in the need for the French government to intervene...The question is, is it going to be through nationalization or through injecting equity?

Bank of France Governor Christian Noyer insisted on Monday that French banks had no liquidity or solvency problems and could withstand any crisis relating to Greece.

NEW PLAN UNDER PRESSURE

During a hastily convened conference call to announce fresh asset sales, SocGen Chief Executive Frederic Oudea said that French banks were solid and that there were no discussions going on concerning a possible state intervention.

There is extreme nervousness and volatility on financial markets, Oudea told reporters.

Oudea said the bank would sell assets -- primarily in its asset-management and specialized financial services divisions -- to raise 4 billion euros in capital by 2013 and cut back on financing activities that were not very profitable.

The CEO told reporters he would not go beyond the 4 billion figure.

But analyst estimates suggest that even to reach that target, SocGen faces some serious hurdles. Even after selling its Securities Services custodian subsidiary, the bank would need to sell another 25 billion euros' worth of risk-weighted assets, assuming no capital gain on the transactions, one analyst said.

SocGen's announcement was intended to mitigate some of the negative pressure expected from a Moody's rating downgrade, said one banking analyst speaking on condition of anonymity.

Some points of the press release are really positive, but I do not think this is having an impact today, he said. The share price reaction today is completely due to the downgrade from Moody's and the jitters on Greece leaving the euro zone.

SocGen's Oudea has been under pressure to act after the bank scrapped its 2012 profit target earlier this year. The company veteran has seen the bank's market value slump by more than 60 percent since the end of June, hit by fears over its funding and speculation it cannot survive without a merger.

The short-term liquidity profile of the bank is very poor compared to peers and its solvency is relatively weak, Espirito Santo analysts wrote in a note.

In an internal memo to employees sent on Friday, SocGen also said that a takeover of the bank would not be a solution, nor was it at risk of happening. The memo also said legal action against the Daily Mail was pending after the newspaper published a story in August saying the bank was close to collapse.

SocGen has struggled to recover reputationally from a devastating trading scandal in 2008. It is still viewed as particularly risky due to its reliance on short-term funding and its business model, which is skewed toward investment banking.

Oudea told reporters there was no immediate plan to update profit forecasts but said the new proposal was designed to cope with new realities, in which funding would be scarcer and more expensive for all banks.

We are speeding things up...Once again the world is probably undergoing a transformation, he said.

Some say the banks have little control over investor sentiment at this point, with markets moving in lockstep with eurozone policy. Others say more aggressive writedowns on their Greek sovereign debt would be a start.

Some including IMF chief Christine Lagarde say Europe needs to recapitalize its banks, which are being squeezed not only by the euro crisis but also by tougher regulations and looming capital requirements under the Basel III regime.

SocGen is targeting a Core Tier 1 ratio well above 9 percent in 2013 under Basel III without a capital increase, Oudea said.

(Additional reporting by Lionel Laurent, Christian Plumb; Editing by Dan Lalor, James Regan and Alexander Smith)

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