How to Profit from French Banking Crisis

European stocks were near a two year low as French banking stocks took a beating during trading in Europe on Tuesday.There are growing concerns that French banks are facing a liquidity crisis that will worsen if Greece defaults on its national debt. French and German financial institutions are particularly vulnerable to a Greek default because of their large holdings of Greek debt.French banks have come under further pressure because of speculation that they might soon be downgraded by Moody's Investor Service. A downgrade for French banks is being talked about because Moody's put them on negative watch nearly 3 months ago on June 15. The ratings agency usually makes a downgrade decision within 3 months of announcing a negative watch. The situation in Europe has only gotten worse since French banks were put on negative watch, so many investors see a downgrade by Moody's as likely.Two of France's mega-banks, BNP Paribas and Societe Generale, both saw their share prices sink on Tuesday, as rumors persisted that they were having liquidity and short-term funding problems. Frederic Oudea, the head of Societe Generale, said in an interview that his bank was profitable and that its exposure to the debt of troubled eurozone members like Greece, Portugal and Ireland was manageable. However, Societe Generale announced on the previous day that it planned to cut costs and sell assets.If Greece defaults on its debt, then European banking stocks will surely fall lower. Investors who feel that a default by Greece is a question of “when not if” might want to consider shorting European financial stocks. Although share prices are already down, they'll fall further on news of a Greek default and the increased likelihood of defaults or debt restructurings by countries like Ireland and Portugal that a Greek default would bring. Investors could also short the euro with the ProShares UltraShort Euro (NYSE: EUO) ETF or move money into the CurrencyShares Swiss Franc Trust (NYSE: FXF) and CurrencyShares Japanese Yen Trust (NYSE: FXY) ETFs.Bullish investors might see the current market lows as a buying opportunity. The European Central Bank has already increased its buying of European debt and China might soon follow. The collapse of Europe's banking sector could send the world into an economic depression, so it's unlikely that Europe's leaders will sit back and watch their banks go bust. The news that China is getting involved should send a positive message to the markets that when the global economy is at risk, leaders will work together to prevent economic collapse.Investors who feel that things won't get much worse for European financial institutions should consider buying the iShares MSCI Europe Financials (Nasdaq: EUFN) ETF. If the outlook for European banks improves, then this ETF should climb higher.