The Beginning Of The Great French Unwind?!?!?!...

Reggie Middleton's picture

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%

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...


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 exposureFrench 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:


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... image008image008image008

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


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...


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 

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Madcow's picture

Does Greece collapse first, then Spain, then France, then Japan? Or does Spain collapse first? Or does France collpase first, then Japan, then Italy?  Does it matter??

Look at the cash flows.  With the fiat money supply shrinking due to the fact that peope are no longer borrowing new money into existence, you can rest assured that - as time goes on - things will get worse and worse and worse and worse. 

Anyone holding on to the IMF$ will find that their future grows collapsier and collapsier - 


rucunus's picture

One question : is BNP more rotten than GS, JPM, BofA, HSBC, RBoS, etc ?


Zero Govt's picture

that answer is symantics

all Big Bwankers are global garbage shuttup and eat your peas

THE DORK OF CORK's picture

Italy however has had much more drastic reductions in oil consumption but with little more then token systems put into place to capture any new base money flows.

Y1998 (1.94 MBD)  

Y2010 (1.53 MBD) 

It current moving average consumption is probally near 1.33 ~ MBD in october (see current November oil market report)


I.e. the country has been destroyed by the regin of the two Marios.

Where has those 600,000 ~ KBD gone ?

Its as if 3 celtic tiger Irelands has been subtracted from the Italian economy.



gaoptimize's picture

Reggie:  Where was your triumphant "I told you so" article on Apple?  I kept watch for it and may have missed it.

Jim in MN's picture

I think France's problem is basically arrogance.  That being the main reason why they don't think they have to bother resolving brutal contradictions that render their overall enterprise incoherent.

Case in point: Allow French banks to become powder kegs of bad assets and corruption while trumpeting independence in key Socialist industries like energy and defense--which will be brought to their knees when the banks collapse.

Similar issues in labor markets.  A lot of 'hiding the cheese' going on, with many forced to work in brutal conditions at home and in the Empire while the upper classes wear socialist or capitalist masks like it's all just a parlor game, passing out 'enough' subsidies to 'enough' interests to BOTH screw up all the economic incentives AND fail to honor a proper social contract.

Which is it, cochons?  This muddled, mixed up concoction would be thrown out of any decent cooking school.

All the laziness begotten from easy credit and the shell games offered by Eurosclerosis.

It will end, and badly.  Hollande may even see it coming, but is he a tactician or a strategist?  I say tactician based on his women.  Not good enough for an epochal crisis.

falak pema's picture

spot on ! navel gazing arrogance. Let them eat cake, and then humble pie. As long as its delicious.

You know, they invented the Cassoulet during the 100 year war, in dire starvation. So resilience is a good thing for the arrogant, it makes them inventive. 

THE DORK OF CORK's picture

French oil consumption 

Y2001 : 2.05 MBD (peak) IEA

Y2010  :1.86 MBD 


Its current moving average consumption is near 1.75 MBD


Most importantly unlike Italy it has now has the systems in place to capture the new flow when or if it increases nominal money (Franc) expansion via the largest European per capita & real rail and tram investment by far.


The French crisis is becoming more and more a monetary crisis as the Euro zone crisis buys it time to increase its core capital base.

Where do you think former Greek capital is flowing into  ?

See above.

Jack Sheet's picture

The bottom line being?


JOYFUL's picture

...If the French and italians go back to national currencies again global industrial capital will flow back and the BRIcs will collapse...

lol...national currencies AND a time machine - to take the populace back to before the age of entitlement and the grand farce of general education...wherein youth were painted a glorious picture of their post-industrial future, where work would become obsolete, and all would retire comfortably through the agency of their never-endly upwardly mobile real estate holdings.

Work(in the sense of the opportunity to exchange labor for a salary or wage) is indeed becoming obsolete in the greater part of the EURO zone...but the part about retiring comfortably has gone greatly askew.

The French, like much of the rest of the formerly first world are still in the denial stage about all of this...the BRICs will thrive and overtake the baguette eaters because their current labor forces were by and large raised without the suspect benefits of the culture of permanent entitlement. As the current group of skilled industrial workers retires, they will not be replaced by a comparably competent work's not just about cheap labor anymore, it's about mis-educated\over-medicated wards of the superstate ...alienated from their labor and everything else.  "Global capital" will continue to flow away from that phenomena like water out a leaky bucket.


THE DORK OF CORK's picture


As long as there is oil in the world capital  will be stronger then labour.

If they don't have entitlement nobody will have the money or time to buy the goods produced by this excess oil

China is a ehhhhh super state also.

After 1986/87 the Euro countries were no longer really nations - they became pure market states with no contol over their internal capital which the banks  extracted of course.


Where do you think the capital came from to build all those China coal & manu. was not was Europe and to a lesser extent the US.

China will have a overcapacity problem when the West pays it people wages rather then credit in national currencies.


France still has one of the cheapest electricity systems in the west , almost as cheap as Poland..........its a no brainer - all other things being equal (especially wages) whatever Industry remains will flow back to these core centres.

Just looked .........its cheaper..............(

Consumption: 7,500 kWh/year (± 30%)   France

€ 0.1279 per KWH


€ 0.1419 

Italy        € 0.2485
JOYFUL's picture

Your research is sound, your presentation well put, yet your conclusions, dare I say so, your lordship, suspect...

Having cheap power available for industrial production is a transitory phenomena...subject to rapid change due to all manner of external circumstance...

more importantly, holding that availability as linchpin of one's competitive model circa 2012 is a little like having the ability to build the most advanced line of man o war just prior to the introduction of the dreadnought...

what you are seeing now in the movement of precious metals out of the west towards the east represents the sea change in the means and methods that production, industrial and otherwise, will involve in the future...a future that is dim indeed for bastions of fiat currency and phony finance...the west is already bankrupt; morally and amount of electrical current will suffice to jumpstart the ticker of the corpse of it's 'post-industrial' economy. 

Capital, btw., knows no allegiance of state or nationality, and flows to whenever opportunity most loudly knocks...Europe is doubly doomed on that score.

THE DORK OF CORK's picture


The Euro is not a sov goverment fiat currency but you have a point regarding cheap also need to transport the goods to market.......

Labour and capital inputs - what else is there ?

You subtract labour inputs via a sov currency which keeps positive money despite private credit contraction  and all there is remaining is current and sunk capital costs.........investment becomes more rational and fixed as the demand signal is wage based rather the credit based.

Capital is not always free and when it is it creates massive externalties as social and domestic energy systems are broken down for short term profit motives - (they tried that free capital thingy within the eurozone and it did not work out too well............)


PS try to look at energy balance sheets post 1986 (single european act / global oil glut) and 2002 (euro physical entry).

You will find china coal consumption went ballistic in 2002 ...........why is that I wonder ?


Also UK and other core countries energy consumption has been more or less static (although declining recently) for 30 - 40 years..........

This is a core wage money deflation projected outwards across the world via  Bric and Pig credit inflation.............


If or when countries print money these wage differences will become less and less important.........what will matter is all the other costs...............


G. Marx's picture


You may think you're all that and then some, but your document formatting skills.......SUCK. If you're not going to take the time to understand how to make an article inviting to read, then get someone to do it for you.


Zaydac's picture

People have nagged him about this for years and he doesn't give a toss; so far as I am concerned it means his subscriber base stays low and there's less competition when he makes an unambiguous call.

Having said that, you must learn to tune out the arrogance, particularly when he says he's the only one to make a good call. He is often the first but since when did being first (usually too early) make a great investor? So far as France's demise is concerned John Mauldin has been banging the drum for a while now. 

More important - where is the $50 dollar price for BNP coming from?

Via Stockcharts: BNPQY highest price on the pink sheets this year USD$27.50 and that was in October

Via Yahoo Finance: highest price Euros 42 and it's still at 41!

Serious question this Reggie; where is your $50 coming from?

Zaydac's picture

Reggie.... HELLO!


When was your BNP $50?


JOYFUL's picture

Dear Grouch(oh!)

Reggie is one of that rare breed who's emphasis on content far outweighs his concern for fluff n format....he dares to do stuff his own way, and to hell with those who don't have the time or the supple synapses to take it all in simply because yes...his work "is all that and more"...

You get to know Reggie's style, you learn to skip over the obvious verbosity and repetitive parts, and pull the nuggets out of the slough...nobody's holding your eyeballs hostage to the screen here bud...the guy's content is amazing...make it inviting to read>>????? ... you nod off while he dissects the situation with surgical skill, and blame that on his lack of presentation skills"...????... kinda like cursing the chef for not spoon feeding you your dinner!

GottaBKiddn's picture

Preach On, Reg!

And don't forget to tear Belgium a new one.

LongSoupLine's picture

...lack of presentation skills"...????... kinda like cursing the chef...


The best chefs (diners to linen napkin establishments) know that presentation is huge part of success.

Anyway, anyone resting on their methodologies and not looking at ways to improve all facets of their business model are candidates for failure.  I'm sure Reggie recognizes this and won't let his ego trump good self analysis based on constructive feedback.

LongSoupLine's picture



Great info, but i second the formatting comment.  It's way too cluttered, not to mention bordering the information overload category.  Also, a liitle less self back slapping would make reading a bit more pleasant.  My comments are truly constructive in nature, so take it or leave it.

THE DORK OF CORK's picture

There is really nothing drastic wrong with French industry (at least whats remaining)


The "structual problems" is one of the Euro which is a gigantic euro capital export machine.


If the French and italians go back to national currencies again global industrial capital will flow back and the BRIcs will collapse.


It is the global and inter euro supply chain is not sustainable on any level.

The real capital wastage & misallocation from  Euro based wage arbitrage operations can no longer be sustained.

augustus caesar's picture

You Europeans are hilarious, nearly all of China's industrial and military technology was stolen from the US.


Your problems can be summarized quite succinctly.


Incessant and unyielding DELUSION

Zero Govt's picture

Europe is most surely deluded but across the pond Washington makes an asylum look almost sane

the military technology the Chinese are copying like Drones, well our Govts haven't seen fit to have them spying all over the globe and indeed now increasingly for domestic use

when it comes to copying delusion there's one go-too place: the US of A

Terp's picture

Sacré bleu!

Quel malheur!

falak pema's picture

dans chaque malheur il y a une lesson. Et le malheur est pour le premier monde, sans exception. 

If there is an REAL unwind in France it will hit all of banking world.