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European ETFs have been in focus over the past month as debt issues in Greece and other Southern European countries have threatened the stability of the common currency system. With the passage of a nearly $1 trillion bailout plan, many thought that the sovereign debt crisis would be contained, at least in the short-term. However, speculation is already brewing that the plan will not be able to save Greece; even if it does, it will likely cause a recession across much of Europe. “Whether Greece over this time period is really in a position, to bring up the strength to make this effort, I have my doubts,” said Josef Ackermann the CEO of Deutsche Bank recently (see Why The European Bailout Is Just Postponing The Inevitable).

While this crisis has caused the decline in many European markets, the damage has been very uneven across the continent. Members of the “PIIGS” bloc of debt-laden countries, such as Spain and Italy, have been among the hardest hit thus far; the iShares MSCI Spain Index Fund (EWP) is down 23.8% over the past four weeks while the iShares MSCI Italy Index Fund (EWI) is down 23.6% over the same time period. While not nearly as hard hit as its Southern neighbors, the iShares MSCI France Index Fund (EWQ) has posted a loss of 17.2% over the past four weeks, one of the worst performers in the euro zone in the time period.

Interestingly, the French downturn has been much more severe than other countries that are not currently suffering from debt crises but are also using the euro. For example, Belgium and the Netherlands have averaged a loss of 13.5% over the past month while the iShares MSCI Germany Index Fund (EWG) is down just 11.9% in comparison. So what’s to blame for the big dip in the France ETF?

The Holdings Are the Key

The main reason for the sharp decline in EWQ is its focus on financials, which are the top sector in the fund and account for about 19.3% of total assets. EWQ’s top financial holdings include BNP Paribas (6.7%), Societe Generale (3.6%) and AXA (3.5%). While AXA is more focused on life insurance, BNP and SG have large levels of exposure to the Greek market and have seen their shares suffer as of late; this exposure to risky debt has weighed heavily on EWQ in recent weeks (see The One ETF Whose Fate Hinges On Greece). BNP Paribas has €5 billion euro in exposure to Greece, the largest of French banks. However, the bank has limited exposure to retail banking in Greece. Meanwhile, Societe Generale holds close to €3 billion of Greek government debt and it holds a majority stake in a Greek retail and commercial bank, Geniki Bank, according to the Associated Press. This suggests that SG will be more heavily impacted by any recession that results in Greece from the austerity measures currently taking place in the country (see more information about EWQ’s holdings here).

Although some are optimistic that the bailout will help prevent any defaults in Greece in the short-term, many are growing increasingly worried that the situation in Greece is unsustainable and that the banks will eventually be negatively impacted. Moreover, concerns that a European recession is increasingly likely as a result of a new round of austerity measures to pay for this bailout have further clouded the outlook. “Clearly the action in the euro is reflecting the fact that at least currency investors don’t think the bailout plan plus the austerity measures are sufficient,” said Uri Landesman, president of Platinum Partners in New York. “The euro is leading the market down.”

Disclosure: No positions at time of writing.

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Source: What's Killing the France ETF?