The French banking sector suffered heavy losses on Monday after French President Nicolas Sarnozy announced that a 0.1% tax will be imposed on financial transactions as of August.

Despite butting heads with numerous politicians in the case of the levy, Sarkozy said that he wanted to set an example. "There's no reason why deregulated finance, which forced us into our current situation, shouldn't participate in the restoration of our accounts," the French president commented last night.

In spite of today's sell-off, this announcement was not much of a surprise since it had been mentioned for some time. Some analysts believe that the market's reaction is excessive.

Adding to the downward pressure facing the sector today, Bank of America Merrill Lynch downgraded its recommendation for Societe Generale to neutral from buy and cut its rating on BNP Paribas to underweight from neutral.

Analysts at Kepler Capital Markets explain that reactions to Sarkozy's announcements, the absence of a debt-swap deal in Greece, and the recent earnings season are spurring profit-taking.

Last week, JP Morgan downgraded its recommendations for BNP Paribas and Credit Agricole.

In afternoon trade in Paris, shares of BNP Paribas, Societe Generale and Credit Agricole were all down at least 5%.

MJJ

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