Bloomberg News

European Banks Need Bigger Greek-Bond Writedowns, IASB Says

August 30, 2011

(Updates with ESMA comment in 12th paragraph.)

Aug. 30 (Bloomberg) -- Some European banks haven’t sufficiently written down the value of Greek government bonds and other “distressed sovereign debt” they own, the organization that sets accounting rules in the region said.

Banks and other financial institutions are valuing the bond holdings in a way that, in some cases, reflects internal models instead of market prices, the International Accounting Standards Board said in a letter published on its website today.

“It is hard to imagine that there are buyers willing to buy these bonds at the prices indicated,” the IASB said in the letter, dated Aug. 4 and sent to the European Securities and Markets Authority. “This is a matter of great concern to us.”

Governments and banks in the 27-nation European Union are negotiating the details of a second international rescue for Greece. On July 21, EU leaders agreed bondholders should contribute about 50 billion euros ($72 billion) to the package. The IASB didn’t name the banks which have incorrectly applied the rules in valuing their bond holdings.

“It is an area that quite clearly needs to be addressed, because historically there has been a perceived lack of consistency” in how the assets are valued, said Bob Penn, a financial regulation partner at law firm Allen & Overy LLP in London.

International accounting rules prioritize “the use of quoted prices in active markets over the use of valuation models developed using internal assumptions,” Hans Hoogervorst, the IASB’s chairman, said in the letter. These rules were being applied in a “visibly inconsistent way,” he said.

Relevant Data

“Although the level of trading activity in Greek government bonds has decreased, transactions are still taking place,” meaning market prices can be assessed, Hoogervorst said. “A company cannot ignore relevant market data.”

The Financial Times yesterday reported BNP Paribas SA and CNP Assurances were among the institutions that had write downs of Greek government debt considered too small by the IASB.

“BNP Paribas has provisioned its exposure to Greece in full agreement with its auditors and relevant authorities” following the July 21 European Union aid plan for the country, according to a statement read by BNP Paribas spokeswoman Carine Lauru by phone.

21 Percent Loss

BNP Paribas, France’s largest bank, wrote down its Greek government-debt holdings by 534 million euros on Aug. 2, the same day it reported a 1.1 percent increase in second-quarter profit. The EU aid plan requires investors to take a 21 percent loss on holdings that mature by 2020.

CNP Assurances made a provision in line with the July 21 EU plan and approved by its auditors, a spokeswoman said.

ESMA attaches “great importance to these issues,” Victoria Powell, a spokeswoman for the authority, said in an e- mailed statement. The authority is investigating “whether differences exist” between banks in the treatment of sovereign debt, she said.

“ESMA maintains a close and regular dialogue with the IASB and the general findings will be shared with them,” Powell said.

--With assistance from Fabio Benedetti-Valentini in Paris. Editors: Christopher Scinta, Heather Smith

To contact the reporter on this story: Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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