Richard Lee

Europe is falling apart and economies both small and large aren’t immune to fears of a meltdown. While Spain and Italy are getting the most attention, you also need to pay attention to France. With the country’s negative economic numbers and wide exposure to both Greece and Spain, the future doesn’t look good for Les Bleus, which is even worse news for the euro (EUR).

Not surprisingly, the markets are in agreement with this bleak picture. The cost for insuring French debt soared to a record on December 20 – rising above insurance costs for the Czech Republic and double that of Europe’s largest economy, Germany.

Since the beginning of the year, the French economy has just barely crawled along. Growth has been kept to a minimum, with quarterly gross domestic product figures barely above 0.5%. Together, this is making for a pretty poor annual performance. The French economy is expected to expand by a low 1.4% this year – much lower than the 2% growth rate in the United States.

Even worse is the fact that the country’s recovery is lagging far behind Europe’s other two powerhouses – Germany and the United Kingdom. Both countries have bounced back better than France, even as their governments raise taxes to offset government spending. Market analysts estimate a rapid 3.7% pace of growth for Germany and a 2% expansion for England.

Part of France’s problems can be found in its manufacturing and service sectors. Although the country’s manufacturing activity has been stable, it’s barely growing. The service sector is worse. According to government statistics, sector activity peaked in May and has steadily been declining ever since – hovering just above break even last month.

This slower-paced recovery has resulted in a relatively high rate of unemployment. True, joblessness isn’t as bad in France as it is in Greece, Spain or Ireland. But it’s still very high – 9.3%, representing 2.6 million people out of work.

So it’s no wonder that consumer sentiment is down. According to the latest polls on the consumer outlook, the French don’t think too highly of the future. Although the index increased over the last couple of months, it remains more than three times more pessimistic than the rest of Europe.

And if all of that weren’t bad enough, you also need to consider France’s ties to Greece and Spain.

According to a report published by the Bank for International Settlements, French banks ranked first when it came to exposure to Europe’s peripheral markets – Greece and Spain. The June 2010 report showed French banks holding about $500 billion, or 31% of the total $1.58 trillion European Union debt load. Approximately 80% of these loans were geared toward private sector projects and not public works.

This means there may be a higher probability of default since corporate entities – not state governments – make up the majority of the outstanding loans. Obviously this eats away at banks’ capital foundation.

French loans to Greece and Spain account for 8.3% of the banks’ Tier 1 capital – or the core strength of a bank. This figure is enormously high. For comparison, it’s four times more the UK bank exposure to those countries, and more than eight times that of US banking exposure to the same.

That means French banks would suffer heavier losses than most banks in the world if these countries outright failed or went bankrupt.

Now, I’m not saying it’s the end of France or the end of Europe. But with French economic fundamentals in the gutter and its deep bank exposure to some of Europe’s most troubled nations, we can’t expect any massive appreciation in the underlying euro currency till next year.

Richard Lee
for The Daily Reckoning

Richard Lee

Richard Lee has been involved in the global financial markets for nearly 12 years, amassing experience with different instruments including equities, options and futures while specializing in foreign exchange.  Before joining Agora Financial, Richard had held proprietary trading positions in various funds, with his current position being in an international Global Macro Fund.  Additionally, Rich was a senior FX strategist for one of the largest retail brokers, helping to develop the firm's research web portal.

Recent Articles

Extra!
Where You Can Make $56,000 a Year Delivering Pizzas

Jim Mosquera

US unemployment rates are some of the most dubious and debatable numbers in economics. And when you look at how the government fudges them it's easy to see why. Today Jim Mosquera attempts to make sense of them, and includes an insightful commentary on another controversial topic: minimum wage. Read on...


Addison Wiggin
The Quickest, Easiest Way to Store Your Wealth Overseas

Addison Wiggin

Over the years, the feds have made it increasingly difficult for you to maintain any semblance of financial freedom. So today, Addison Wiggin details one strategy that will go a long way to keeping them at bay, and allow you to keep more of your hard-earned money in the process. Read on...


The Next Phase of Gold Profits is About to Begin

Frank Holmes

Today Frank Holmes shows how tracking the past history of the Federal Reserve's Funds Rate Cycle can be a powerful prediction tool for gold investors. Specifically, he points out why this is the beginning of a period in the cycle that's historically favorable for the price of gold, and how you can take advantage of it. Read on...


Laissez Faire
A Graceful Way Around Obamacare Mandates

Jud Anglin

Real health care reform isn't going to come in the form of laws, rules, and regulations. It's going to come from people looking to do things differently and find savings where none previously existed. And that means developing new technology that expands medical coverage. Now if only government got out of the way...


188 Stocks that Could Benefit from a Short Squeeze

Greg Guenthner

With the market hitting new highs all the time, many investors are beginning to think that a dramatic drop in stock prices is right around the corner. But while they continue to add short positions to their portfolios, you can take the opposite side of the trade and laugh all the way to the bank. Greg Guenthner explains...