Roughly two quarters ago, I warned subscribers that markets were overlooking a distinct concentration of risk in France. Interestingly enough, many believed France to be a stalwart, alongside fellow ECB boss Germany, as one half of the strongest economic duo in the EU. Our take was that France's exposure to Italy (and the other PIIGS states) through its highly leveraged and funding mismatched banking system was a house of cards waiting to happen. I also asserted that Italy was nowhere near as strong a credit as the media and the sell side has made it out to be. As a quick recap:

Subscriber document (click here to subscribe) from March 2010 (exactly 1 1/2 years ago): [PDF] Italy public finances projection, as excerpted from page one...

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Did I have a point? Well, a full year and a half later, as per Moody's by way of ZeroHedge...

As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative. Then again, this was pretty much telegraphed 100% earlier today as noted in "Italy Expected To Cut Growth Forecasts Further." Anyway, those incompetents from Moody's are next.

Full report:

Italy Unsolicited Ratings Lowered To 'A/A-1' On Weaker Growth Prospects, Uncertain Policy Environment; Outlook Negative

Overview

• Italy's net general government debt is the highest among 'A' rated sovereigns. We have revised our projections of Italy's net general government debt and now expect it to peak later and at a higher level than we previously anticipated.
• In our view, Italy's economic growth prospects are weakening and we expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges.
• In our view, weaker economic growth performance will likely limit the effectiveness of Italy's revenue-led fiscal consolidation program.
• We have revised our base-case medium-term projections of real GDP growth to an annual average of 0.7% between 2011 to 2014, compared with our previous projection of 1.3% (see "Credit FAQ: Why We Revised The Outlook On Italy To Negative," published May 23, 2011). As part of our ratings analysis, we have also prepared upside and downside macroeconomic scenarios that could drive our future rating actions on Italy.
• We are lowering our long- and short-term unsolicited sovereign credit ratings on Italy to 'A/A-1' from 'A+/A-1+'.
• The negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy's real and nominal GDP growth, and implementation risks of the government's fiscal consolidation program.

We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges.

 So, what does this have to do with French banks?

Well, if you subscribed, you'd already know, but I'll spill the beans anyway. On Wednesday, 03 August 2011 I digitally penned "France, As Most Susceptble To Contagion, Will See Its Banks Suffer". Long story, short - France and French banks are uniquely and solely situated to suffer from excessive leveraged exposure to both Greece AND Italy. What an enviable position. Italy CDS seemed to be underpriced for quite some time, but not anymore. The cat is apparently out of the bag. Interested parties should have acted back when the origianal BoomBustBlog Italian Finances report was released: March 2010 (exactly 1 1/2 years ago): Italy public finances projection. According to ZH, Italy 5 Year hit 520 earlier, a new all time record.

And the run on Banques de Francais continues???

Let it be known that Siemens claims the FT piece contained factual innacuracies. That doesn't necessarily preclude the inclusion of actual factual accuracies, does it? Siemens is an institutional counterparty to French banks. Remember how I said modern day bank runs will be conducted? As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable. A more important concern appears to be the threat of short-term liquidity and funding difficulties for European banks stemming from said haircuts. This is the one thing that holds the entire European banking sector hostage, yet it is also the one thing that the Europeans refuse to stress test for (twice), thus removing any remaining shred of credibility from European bank stress tests. As I have stated many time before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!

The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason. Signs of excess stress perceived in the US combined with the conservative nature of US money market funds (post-Lehman debacle) may very well lead to a US led run on these banks. If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears

UK banks have pulled billions of pounds of funding from the euro zone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.

 Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to euro zone banks, raising the prospect of a new credit crunch for the European banking system.

Standard Chartered is understood to have withdrawn tens of billions of pounds from the euro zone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.

In its interim management statement, published in April, Barclays reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn last June, while its exposure to Italy has fallen by more than £100m.

One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the euro zone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.

Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.

Make no mistake - modern day bank runs are now caused by institutions!

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

Remember, I gave the warning on French banks and BNP Paribas in particular back in July. BNP is down nearly 70% from that point!

I will continue this theme in my next post. All readers and subscribers should review he tBNP Paribas "Run On The Bank" models available for download, free of charge - http://t.co/SDPUuNSy. See for yourself if France's 2nd biggest bank needs capital!

Just wait until the market catches on to our American bank exposed to this mess. It'll make a much bigger and more interesting story than the French bank run theme, that's for sure. Subscribers, see:

Actionable Note on US Bank/ French Bank Run Contagion, then peruse this bank's latest quarterly analysis in our subscription content area. Be prepared!.

Then there's the next ZH headline: IMF Cuts Global Growth Outlook, Says Europe May Worsen Outlook

Flurry of headlines following an unscheduled IMF release:

• IMF CUTS GLOBAL GROWTH ESTIMATE, SAYS EUROPE MAY WORSEN OUTLOOK
• IMF SAYS DOWNSIDE RISKS ARE GROWING
• IMF SAYS ECB SHOULD CUT INTEREST RATES IF DEBT TENSIONS PERSIST
• IMF CUTS U.S. 2011 GROWTH ESTIMATE TO 1.5% VS 2.5% SEEN IN JUNE
• IMF CUTS U.S. 2012 GROWTH ESTIMATE TO 1.8% VS 2.7% SEEN IN JUNE
• IMF CUTS 2012 EURO-AREA GROWTH PREDICTION TO 1.1% VS 1.7%/JUNE
• IMF CUTS 2011 WORLD GROWTH FORECAST TO 4% FROM 4.3% IN JUNE
• IMF CUTS 2012 WORLD GROWTH FORECAST TO 4% FROM 4.5% IN JUNE
• IMF SAYS ECB MUST KEEP INTERVENING `STRONGLY' IN DEBT MARKETS
• IMF CUTS SPANISH GROWTH FORECAST FOR 2012 TO 1.1%

I say to myself, what the Fongoozess? Is there still anybody listening to the IMF forecasts. Let's walk though a BoomBustBlog classic as a refresher as to whether you should follow a blog or the IMF. As excerpted from Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

The IMF and the EU have been consistently and overtly optimistic from the very beginning of this crisis. Their numbers have been dramatically over the top on the super bright, this will end pretty, rosy scenario side - and that is after multiple revisions to the downside!!! We can visit the US concept of regulatory capture (see How Regulatory Capture Turns Doo Doo Deadly and Lehman Brothers Dies While Getting Away with Murder: Regulatory Capture at its Best) for the EU, but due to time constraints we will save that topic for a later date. To make matters even worse, the sovereign states have taken these dramatically optimistic and proven unrealistic projections and have made even more optimistic and dramatically unrealistic projections on top of those in order to create the illusion of a workable "austerity" plan when in reality there is no way in hell the stated and published plans will come anywhere near reducing the debts and deficits as advertised - No Way in Hell (Hades/Tartarus/Anao/Uffern/Peklo/Niffliehem - just to cover some of the Euro states caught fudging the numbers)!

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

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Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.

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Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

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What about the UK?

I'm glad you asked. We just finished our UK analysis (subscribers, see UK Public Finances March 2010 2010-03-24 09:32:01 617.23 Kb), and the Greek theme has continued into the land of the Brits.

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... and in terms of government balance over-optimism???

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And what about Italy???

Again, we're glad you inquired. Subscribers should download Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as the Italian Banking Macro-Fundamental Discussion Note and the Spanish Banking Macro Discussion Note in anticipation of our upcoming Spain analysis, which should be a doozy!

This is Italy's presumption of economic growth used in their fiscal projections:

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For those that don't subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here: Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?

Those who wish to subscribe to BoomBustBlog research, analysis and opinion should click here! You can follow my public comments via the following avenues....

Reggie Middleton Boom Bust Blog

Next up I will reveal some more juicy tidbits about BNP Paribas, another home run hit by BoomBustBlog subscribers who caught this one months in advance!As per ZeroHedge this morning:BNP Freefalling

Well, as expected, the Chinese news finally filtered through to the vacuum tubes. It took them a few hours... But it is finally there. BNP is down 7.3% at last check and tumbling. Comments from the IMF, which is always behind the curve, are not helping.

Relevant subscriber documents:

• BNP Exposures - Professional Subscriber Download Version
  BNP Exposures - Retail Subscriber Download Version
• BNP Exposures - Free Public Download Version
• Trading Opinion and Analysis 9-14-2011
• Trading Opinion and Analysis 9-7-2011
• French Bank Run Forensic Thoughts - Addendum and Update