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How to Profit from Moody's Downgrade of French Banks

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The markets were dealt another blow on Wednesday when Moody's Investors Service downgraded two of France's biggest banks and placed a third on review.

Societe Generale and Credit Agricole were downgraded, while Moody's said that it would take more time to review BNP Paribas. There had been increasing talk about looming downgrades of French banking giants Societe Generale, Credit Agricole and BNP Paribas because Moody's Investors Service put them on its negative watch list nearly 3 months ago on June 15. Moody's usually makes a decision within 3 months of placing a company on its negative watch list, so many traders expected the downgrades.

French banking stocks led European shares lower this week as rumors circulated that French banks face liquidity and short-term funding problems. Although Societe Generale and BNP Paribas claim that concerns about their liquidity are exaggerated, both banks announced plans this week to sell billions of dollars worth of assets.

Besides the liquidity rumors and the credit rating downgrade by Moody's Investors Service, the market is also concerned about the effects that a Greek default would have on French banks. French banks are believed to be particularly vulnerable to a Greek default because they have a relatively large exposure to Greek debt.

Investors are eagerly waiting for what comes out of a scheduled conference call between French President Nicolas Sarkozy, German Chancellor Angela Merkel and Greek Prime Minister George Papandreou. Prime Minister Papandreou is expected to update them on the situation in Greece and discuss rumors that Greece is near default. Prime Minister Papandreou made a public promise over the weekend that Greece would not default but he may try to use the talk to win concessions from the eurozone's two most important leaders.

The markets were further rattled on Wednesday because Chinese Premier Wen Jiabao squashed rumors that China would bailout ailing European governments by purchasing large amounts of their debt. Premier Wen Jiabao said that European countries need to "put their own houses in order” and not expect China to bail them out.

There are a number of ways to play the downgrade of two of France's biggest banks during these turbulent times.

Although the two banks are considered “too big to fail” by the French government, if the problems they face are anywhere near as bad as rumored, the entire European economy could suffer. If France's banking woes spread throughout Europe, then the ProShares UltraShort MSCI Europe (NYSE: EPV) and the Market Vectors Double Short Euro (NYSE: DRR) could be two investments worth considering.

Although European financial stocks are not popular right now, they could easily rebound if Greece avoids a default. If Greece gets through the next few weeks without defaulting, European financial stocks could start moving higher. If this happens, then the iShares MSCI Europe Financials (Nasdaq: EUFN) ETF and European banking stocks like Banco Santander (NYSE: STD), Deutsche Bank (NYSE: DB) and National Bank of Greece (NYSE: NBG) could be big gainers.

 

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