Why France is Fu...

It sure feels like the beginning of a collapse. One small event ignites a chain reaction. But paradoxically, it was not the event that caused the crisis.  That blame should fall on the fragility of the system. Note, however, that I am not an expert European banking analyst, but these are my conclusions based on an hour of analysis.

Below is an article titled "Biggest French Banks ... Poised to be Downgraded by Moody's"

Link to Bloomberg Article

So is this rumor mongering, or do the facts justify concern? Let's look at BNP, the largest of the 3 banks mentioned:

As of 6/30/11, BNP has 1.93 trillion euro of assets, offset by 1.84 trillion euro in liabilities. So the equity stake in BNP is a slim 87bn euro. The reason why this is an issue is b/c the leverage (assets dividend by equity) is so very high at 22x. This means that if their assets (loans, available for sale securities, sovereign bonds, etc.) decline by more than 5%, then the equity gets wiped out, stock is worth zero. As of Friday, BNP had a $35bn market cap (according to Yahoo Finance). 

Now their Greek bond exposure is only 3.8 bn euros (or 4% of total equity) so it's not enough to kill the bank if Greece defaults. I guess this is why the Bloomberg article suggests Moody's is only looking to lower BNP's rating by "one level."

But I guess the secondary question, and more important analysis, is how much of their 1.93 trillion in assets were from Greece and other struggling European countries?  Below is a link to their 2010 annual report:

BNP 2010 Annual Report

I didn't see any chart that gave me a good answer (always a "red flag" when obvious questions aren't quickly and easily answered) so I'm going to use pg. 89, the workforce "breakdown by geographic area" as a proxy. In which case 27% of loans are "Europe (out of domestic markets)" - whatever that's supposed to mean.  Let's assume 20% of which (complete guess) is from Greece or 5.4% of the total. BNP has 1.76 trillion in loans and other income producing assets so we can guesstimate that 95bn (5.4% of 1.76 trillion) is linked to Greece - that's more than the total equity value!

This may provide a little context as to why BNP stock has fallen 45% since the beginning of July. The market is saying "dude, you're insolvent."