(Adds Italian budget-cutting plan in sixth paragraph.)
July 13 (Bloomberg) -- French banks, including BNP Paribas SA and Credit Agricole SA, have the most at risk from the euro- region’s debt crisis infecting Europe’s largest borrower, Italy.
At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel, Switzerland-based Bank for International Settlements. That’s the most for financial institutions from any foreign country and more than double held by German lenders.
“They’re on the frontline,” said Julian Chillingworth, who helps manage about 16 billion pounds ($25 billion) at Rathbone Brothers Plc in London. “French banks like BNP Paribas have taken substantial positions in Italy when the market opened up to foreign players and now they face the downside.”
Italian stocks and bonds have been roiled on concerns about the country’s ability to trim debt after warnings by Moody’s Investors Service and Standard & Poor’s and infighting in Silvio Berlusconi’s government over a budget-cutting plan. Italy’s woes may overshadow efforts to fix Greece’s finances, which have left European policy makers struggling to find a strategy that won’t spark a region-wide debt panic.
Italy, whose 1.6 trillion euros ($2.23 trillion) of bonds outstanding is the largest debt load in Europe and behind only the U.S. and Japan, had avoided being sucked into the financial crises engulfing Greece, Ireland and Portugal. Confidence eroded after both Moody’s and S&P in the past two months said they were reviewing ratings for Italy and its banks.
Italian stocks entered a bear market on July 11, defined as losses of more than 20 percent from a previous high, and 10-year Italian yields reached the highest in 14 years. Stocks recovered and yields on 10-year Italian notes retreated from a euro-era high of 6.02 percent after the completion yesterday of an auction of 6.75 billion euros of treasury bills and Berlusconi’s reassurances on hastening the passage of a 40 billion-euro deficit-cutting plan.
“These are positive signs, but it would be better to anticipate markets rather than to react to them,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “It’s as if politicians got down on their knees before the markets.”
BNP Paribas, which slid to its lowest level in 7 ½ months this week, rose 1.2 percent to 47.51 euros in Paris trading as of 12:30 p.m. France’s biggest bank has fallen 11 percent this month, more than double the 5.1 percent decline in the 49-member Bloomberg Europe Banks and Financial Services Index. Credit Agricole has dropped 13 percent, while Societe Generale, France’s third-largest bank by assets, slid 11 percent.
“The French banks’ case is being tested because of Italian wobbles coming in the wake of the Greek uncertainty persisting longer than expected,” said Matthew Czepliewicz, an analyst at Collins Stewart in London.
Pascal Henisse, a spokesman at BNP Paribas in Paris, Credit Agricole’s spokeswoman Stephanie Ozenne and Societe Generale’s spokeswoman Astrid Brunini all declined to comment on the turmoil in Italy and its impact on their banks.
About 45 percent of Italian debt held by foreign banks is carried by French institutions, according to BIS data.
French banks’ Italian debt holding is more than their combined exposure to Spain, Portugal, Ireland and Greece, which stood at $253.8 billion at the end of 2010, according to BIS data. The lenders had $97.6 billion in Italian sovereign debt at the end of the year, dwarfing their $57.5 billion of such debt from the four other countries, the data show.
Drawn by the lucrative financial industry in Italy, French financial companies spent at least 20 billion euros since 2006 to buy banking and insurance assets in the euro-area’s third- largest economy.
BNP Paribas and Credit Agricole, France’s second-largest bank, bought two of Italy’s 10 largest lenders. At the end of 2010, BNP Paribas held more Italian than French sovereign debt.
BNP Paribas, which acquired Rome-based Banca Nazionale del Lavoro SpA in 2006 for 9 billion euros, has about 900 branches in Italy. Credit Agricole operates about 960 branches in Italy. BNP’s 19,000 and Credit Agricole’s 12,000 employees in Italy are the most outside their home market.
Paris-based BNP had 71.2 billion euros of loans at its BNL unit at the end of March, compared with BNL’s 31.7 billion euros of deposits, according to its website. Credit Agricole’s Italian retail-banking unit, Cariparma, had 31.6 billion euros of loans and 30.3 billion euros of deposits at the end of March, company data show.
“Credit Agricole’s funding position in Italy is more conservative compared with BNP Paribas’s,” said Dirk Hoffmann- Becking, an analyst at Sanford C. Bernstein. “BNP makes up the gap by channeling funds from the corporate center.”
Investors’ concerns about commercial and sovereign debt held by BNP Paribas and Credit Agricole in Italy may be mitigated by the overall funding capacities and deposits base of the French banks, analysts and investors say.
“When you break down the exposures into their major components, the asset quality implications do not seem as negative as the share price movements often indicate,” Czepliewicz said. “Do recent sovereign debt movements change something in the quality of BNL’s lending book? Probably not.”
Also, the fears of a contagion may be overblown, the Collins Stewart analyst said.
“The question is if an Italian contagion would be fundamentally grounded or is just panic,” he said. “My sense is: it is just panic.”
Italy has “big advantages” over other southern European nations as it has low foreign debt, a primary budget surplus, long debt maturity and lack of a housing-market “bubble,” a team of strategists at Credit Suisse Group AG led by Andrew Garthwaite in London wrote in a report yesterday.
Those advantages may matter little in a market gripped by panic, and may require European leaders to act firmly and quickly, some investors said.
“We’ve seen fever spikes,” said Valerie Cazaban, who helps manage 100 million euros at Stratege Finance in Paris and holds shares in BNP Paribas. “European policy makers should contain it as soon as possible before the illness bursts out.”
--With assistance from Boris Groendahl in Vienna and Alexis Xydias in London. Editors: Vidya Root, Frank Connelly
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