Bloomberg News

Dexia, BNP Resist Greek Losses Three Times Worse Than Booked

October 04, 2011

(Updates credit-default swaps in 10th paragraph.)

Oct. 4 (Bloomberg) -- Dexia SA, BNP Paribas SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default, or if European governments force banks to accept bigger losses than signaled in July. The three would have about 3 billion euros ($4 billion) of extra losses if they took writedowns of 50 percent, data compiled by Bloomberg show.

The three are some of the top foreign holders of Greek government bonds. They were also among the worst performers in the 46-member Bloomberg Europe Banks and Financial Services Index yesterday. Europe’s markets regulator last week likened the inconsistency and lack of transparency about the banks’ holdings to subprime mortgages that triggered the credit crisis. French and Belgian financial regulators say they are scrutinizing the practice. European finance ministers are weighing forcing creditors to take bigger losses than the 21 percent proposed in July under a second aid plan for Greece.

“It’s no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns,” said Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director of New York-based Citigroup Inc. “You’ve got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system, and is one of the reasons why the shares are being hit so badly.”

Dexia Drops

Further writedowns of Greek sovereign debt would add pressure on the banks to raise capital to meet regulations set by the Basel Committee on Banking Supervision. Societe Generale may need to raise 5.5 billion euros of additional capital to comply with the Basel III rules by the end of 2012, Kian Abouhossein, a JPMorgan Chase & Co. analyst, wrote in a Sept. 26 report. BNP Paribas may need 600 million euros, the report said.

At the same time, the sovereign debt crisis is driving down banks’ shares and raising the cost of insuring their bonds against default, making any fundraising costlier.

BNP, SocGen

Dexia, the municipal lender rescued by France and Belgium in 2008, tumbled 22 percent in Brussels trading today as the lender weighs a possible breakup. The lender may create a “bad bank” for its troubled assets, according to a person with knowledge of the talks who declined to be identified. BNP Paribas and Societe Generale both fell about 5 percent in Paris trading.

The Bloomberg European banks index has dropped 36 percent this year as policy makers have failed to stem concern that they can stop the crisis from spreading beyond Greece to Italy and Spain, triggering losses for the region’s lenders.

Societe Generale, based in Paris, has fallen 55 percent this year, while BNP Paribas has sunk 43 percent.

The cost of insuring the debt of the three banks against default has jumped over the past four weeks, Bloomberg data show. Credit-default swaps on BNP Paribas’s borrowings jumped to 286 basis points today, up from 263 basis points yesterday. CDS on Societe Generale rose to 384 basis points from 352. CDS on Dexia slipped to 737 basis points from 806 basis points yesterday after the French and Belgian governments said they will take “all necessary measures” to protect clients and will guarantee all Dexia’s loans. A basis point is one-hundredth of a percent.

Fair Value

The Markit iTraxx Financial Index of CDS on the senior debt of 25 European banks and insurers was at 289 basis points yesterday, according to JPMorgan, down from its 315-basis-point record in September.

Under International Financial Reporting Standards, banks are required to write down to fair value securities they hold in their available-for-sale portfolio if a default becomes likely.

Greek 10-year government bonds have tumbled to 41.5 cents on the euro, from 66.2 cents at the start of the year, as the crisis worsened, Bloomberg data show. Greek 5-year debt was trading at 42.7 cents on the euro, from 62.8 cents on Jan. 3, the data show. The price of the Greek 30-year bond slid to 32 cents, from 54.1 cents.

Credit-default swaps signal the likelihood of Greece defaulting in the next five years at about 91 percent.

Twenty-two European banks, including Deutsche Bank AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc, wrote down their holdings to market value at the end of July, triggering losses of as much as 51 percent, according to a Sept. 8 report by Sarah Deans, a Citigroup analyst, who studied the Greek holdings of 28 European banks at the end of the second quarter.

Rescue Package

As European leaders sought to provide a rescue package for Greece in July, the International Institute of Finance, which lobbies for financial firms, agreed that lenders would participate in an exchange and debt-buyback program. As part of the deal, they would voluntarily write off the value of their Greek government bonds that mature before the end of 2020 by about 21 percent. The German parliament voted to support the plan last week.

Dexia, BNP Paribas and Societe Generale are among the four biggest foreign holders of Greek sovereign bonds, according to Citigroup. Together with Credit Agricole SA, Paris-based Natixis SA and UniCredit SpA, Italy’s biggest lender, they say the IIF agreement justifies reducing the value of their Greek bonds maturing by only 21 percent. Dexia and BNP also have said there’s no liquid market for the securities.

Additional Writedowns

Dexia, which in August posted its biggest quarterly loss ever, has written down the 1.6 billion euros of Greek bonds it holds that expire before 2020 by about 340 million euros, according to Citigroup. The bank would need to take an additional 1.5 billion-euro writedown to mark down all 3.6 billion euros of Greek bonds available for sale, company filings show. That’s more than half its market value.

Executives at Dexia didn’t return calls for comment about the bond holdings yesterday.

BNP Paribas wrote down 2.3 billion euros of Greek bonds maturing before 2020 by 534 million euros in the second quarter. The bank would have an additional pretax writedown of 1.7 billion euros if it took a 55 percent writedown on the 3.5 billion euros of debt on its banking book, it said on its website Sept. 14. It said the losses would be “manageable.”

“Our residual exposure of 3.5 billion euros is smaller than first-quarter pretax earnings,” Carine Lauru, a Paris- based spokeswoman, said in a phone interview.

‘Played the Rules’

Societe Generale had marked down the 1.8 billion euros in its available-for-sale portfolio by 395 million euros as of June 30, according to the lender. A writedown of 50 percent would result in an additional net loss of about 100 million euros to 150 million euros, Chief Executive Officer Frederic Oudea, 48, said Sept. 12. Laetitia Maurel, a spokeswoman for the bank, said Societe Generale has already marked down its Greek bonds by an average of 35 percent and reduced its “residual exposure” to about 900 million euros.

“The French banks ultimately took a view that suited their own interests, and while it may seem pretty extraordinary, they have followed the letter of the law,” said Richard Murphy, an accountant and director of Ely, England-based Tax Research LLP. “They’ve played the rules to their advantage.”

UniCredit posted an impairment of 79 million euros on all Greek bonds it recorded as available-for-sale at the end of the second quarter, equivalent to about 27 percent of the total, company filings show. A 50 percent writedown would cost the bank an additional 69 million euros. Andrea Morawski, a spokesman for the Milan-based firm, declined to comment.

‘Not Feasible’

Some European leaders, particularly in Germany, are now pushing banks and insurers to accept bigger losses than the 21 percent proposed in July to reflect the worsening of the crisis. Otmar Issing, a former European Central Bank chief economist, is calling for a 50 percent write-off. Patrick Armstrong, managing partner at Armstrong Investment in London, which oversees $345 million, said he expects it to be about 40 percent.

“As far as private sector involvement is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

IIF Lobbying

Banks are lobbying against potentially bigger losses through the IIF. Josef Ackermann, 63, the IIF’s chairman and CEO of Frankfurt-based Deutsche Bank, said in a Sept. 25 speech that it’s “not feasible” to revise the agreement.

The banks that have already written down their holdings to market prices are less vulnerable to further impairments if the bond-exchange program is redrawn. RBS, the U.K.’s biggest government-controlled bank, has marked down the relevant bonds by 50 percent, HSBC, Europe’s largest bank by market value, by 51 percent, and Intesa Sanpaolo SpA, Italy’s second-biggest lender, by 40 percent, according to Citigroup.

Greece “is not an issue” for Societe Generale, CEO Oudea said on a conference call Sept. 12. The bank said it has “low, declining and manageable sovereign exposure” of 4.3 billion euros to Italy, Spain, Portugal, Ireland and Greece.

BNP Paribas’s holdings of Greek, Irish and Portuguese sovereign debt are “manageable,” the bank said in a presentation on its website. Any writedowns on Greek bonds in the bank’s third-quarter earnings report will depend on how the IIF’s July proposals are implemented, the company said Sept. 26.

‘Consistent’ Valuations

Dexia CEO Pierre Mariani, 55, said at a Paris press briefing three weeks ago that any further provisions will depend on the outcome of the Greek bailout package agreed to in July.

The European Securities and Markets Authority, the umbrella group for European financial regulators set up in 2010, and the International Accounting Standards Board are pressuring national regulators to force banks to mark holdings to market.

“It’s very important for ESMA that financial institutions apply IFRS correctly and are consistent in their valuations of sovereign debt exposures,” Steven Maijoor, the group’s chairman, said in a Sept. 29 speech in Vienna. “Lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks. A lack of transparency from banks on their exposures to sovereign debt and related instruments is generating new suspicions.”

Reemt Seibel, a spokesman for the group, said members discussed the question at a meeting two weeks ago and that it was now up to national regulators to enforce the standards.

Enforcing Standards

“In a very stressed context, the issue of the valuation of sovereign debt is complex,” France’s financial markets regulator, the AMF, said in an e-mailed statement. “The AMF is working on this issue, which requires gathering data and explanations from issuers and their auditors and assessing the situation with our own market experts.”

The regulator said it’s important for regulators to provide guidance to banks on “how this issue should be dealt with” by the end of the financial year.

“The application of IFRS is in the first instance the responsibility of listed companies and their auditors,” Jim Lannoo, a spokesman for the Belgian financial regulator, said in an e-mail. “As a national supervisory authority, we are of course closely following these issues.”

--With assistance from Gavin Finch in London, Sonia Sirletti in Milan and John Martens in Brussels. Editors: Edward Evans, Robert Friedman.

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net


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