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Want evidence that the consequences of the European debt crisis extend far beyond debt-laden Ireland, Greece, Portugal, Italy, and Spain? Look no further than France's three largest banks--BNP Paribas, Société Générale and Crédit Agricole--which hold nearly $57 billion in Greek debt compared with $34 billion held by the largest German banks and $14 billion at British banks. That's not an enviable position to be in at a time when Greece is failing to meet its fiscal targets, sparking renewed fears of a Greek default. In a Wall Street Journal op-ed on Tuesday, Nicolas Lecaussin, the director of development at France's Institute for Economic and Fiscal Research stated that concerns about the exposure of French banks to Greek debt have gotten so bad that BNP can no longer borrow in dollars, according to an anonymous bank executive.

BNP has subsequently denied Lecaussin's bombshell report, claiming it is able to fund itself in dollars at normal levels both "directly and through foreign-exchange swaps." This statement, plus Société Générale's assurances today that the bank isn't dangerously exposed to European sovereign debt and can withstand a freeze in dollar financing from U.S. money-market funds, has enabled both banks to rebound in trading after incurring substantial losses.

While BNP and Société Générale shares may be rallying, however, news reports are offering ample reason to still be concerned about French banks. The market continues to be rattled by a Moody's threat to downgrade the credit ratings of French banks, and Italy--whose debt French banks also own--is reeling from record-high borrowing costs, stirring additional worries about French exposure. The New York Times adds that it's becoming more expensive for French banks to finance their day-to-day operations, prompting questions about whether the French government will need to step in and support its "too-big-to-fail" banks like the U.S. government did in 2008 (French officials are currently dismissing the notion of even a partial nationalization of French banks). "Given the need for France, along with Germany, to play a central role if the European debt crisis is to be resolved," The Times writes, "the perceived stability of the biggest French banks is a crucial issue." U.S. financial institutions, which are exposed to French banks, are also watching the situation closely. Just another reminder of the interconnected global financial system, and the speed with which contagion can spread.

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