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The Great French ‘Unwind’ Begins…

  • Written by Syndicated Publisher No Comments Comments
    November 22, 2012

    Five months ago I posted ‘Moody’s Actions Add Pressure To The Inevitable In France?‘ Yesterday we see MOODY’S DOWNGRADES FRANCE’S GOVT BOND RATING TO Aa1 FROM Aaa as well as FRANCE MAINTAINS NEGATIVE OUTLOOK BY MOODY’S. As excerpted from the Moody’s press release (emphasis supplied by ZeroHedge)…

    Moody’s decision to downgrade France’s rating and maintain the negative outlook reflects the following key interrelated factors:
    1.) France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
    2.) France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
    3.) The predictability of France’s resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France’s exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.

    Moreover, France’s credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France — like other large and highly rated euro area member states — may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then.

    In light of the liquidity risks and banking sector risks in non-core countries, Moody’s perceives an elevated risk that at least part of the contingent liabilities that relate to the support of non-core euro area countries may actually crystallise for France. The risk that greater collective support will be required for weaker euro area sovereigns has been rising, most for notably Spain, whose economy and government bond market are around twice the combined size of those of Greece, Portugal and Ireland. Highly rated member states like France are likely to bear a disproportionately large share of this burden given their greater ability to absorb the associated costs.

    More generally, further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France, and further accentuate the fiscal and structural economic pressures noted above. While the French government’s debt service costs have been largely contained to date, Moody’s would not expect this to remain the case in the event of a further shock. A rise in debt service costs would further increase the pressure on the finances of the French government, which, unlike other non-euro area sovereigns that carry similarly high ratings, does not have access to a national central bank that could assist with the financing of its debt in the event of a market disruption.

    Excerpts from my warning 5 months ago, which has a slightly different, although potentially more realistic bent…

    As a result Italian yields went up a few days ago – Italian Yields Forced Higher on Rating’s Cut Ahead of Debt Sale, and went even higher today as Bund yields were actually issued with negative yields pushing that spread/gap ever wider… Bunds rise as Germany sells debt at negative yields

    Italian 10-year yields were four basis points up at 6.07 percent, with two-year debt underperforming, yielding 8 bps more on the day at 3.96

    Mish (Mike Shedlock) adds… Italy GDP expected to contract by 2% globaleconomicanalysis.blogspot.com/…/

    So, when are the alarms going to be sounded by anybody other then BoomBustBlog for France??? I have made this quite clear in the past, namely in Watch The Pandemic Bank Flu Spread From Italy To France To … where I simply quoted the arithmetical obvious, then in French Banks Can Set Off Contagion That Will … where I basically did the same. The French banking problem is woefully unrecognized, although I’m sure the rating agencies will pick up on it this time next year, after the collapse and/or bank run. This is basically the gist behind that hard hitting European documentary on the US rating agencies…

    Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

    Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies’ effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00…

    Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

    Subscribers can reference French Bank Observations & Focus on…(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report…

    French bank Italian exposure

    French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

    Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

    As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

    BNP_Paribus_First_Thoughts_4_Page_01

    This is how that document started off. Even if we were to disregard BNP’s most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post “The BoomBustBlog BNP Paribas “Run On The Bank” Model Available for Download”” (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP’s bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model… image008

    To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further…

    BNP_Paribus_First_Thoughts_4_Page_09

    So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well – well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it’s a potential tangible equity wipe out, or is it? On to page 10 of said subscription document…

    BNP_Paribus_First_Thoughts_4_Page_10

    Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that’s enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I’ll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don’t subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)…

    Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement

    I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

    Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

    In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

    I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

    Subscribers, see also

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record
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