Bloomberg News

ESMA Warns of Varied Sovereign-Debt Writedowns, Issues Guidance

November 27, 2011

(For more on Europe’s debt crisis, see EXT4.)

Nov. 25 (Bloomberg) -- The European Securities and Markets Authority today published guidance on how banks should value their holdings of sovereign debt as part of a drive to wipe out inconsistencies in how lenders write down bonds issued by Greece and other crisis-hit nations.

A fact finding mission carried out by the authority on how some banks’ had valued Greek bonds in their half-yearly statements had shown that “accounting practices of financial institutions” were “varied,” ESMA said, including for “the extent of debt exposures subject to impairment losses.”

“The consistent application” of international accounting rules “in important for the proper functioning of financial markets,” ESMA said in an e-mailed statement.

The Greek government is in negotiations with the Institute of International Finance, which represents more than 450 financial firms, on the details of an agreement to write down the country’s bonds by 50 percent, in an attempt to save the country’s economy from collapse. The debt swap may take place next month, the IIF has said.

The International Accounting Standards Board warned in August that some European banks hadn’t sufficiently written down their holdings of “distressed sovereign debt.”

Banks should also provide “quantitative and qualitative information” on their holdings of credit-default swaps on sovereign debt, ESMA said. This should include the “estimated level of protection” that the bank has from losses because of the CDSs.

Investors buy CDSs as insurance to protect themselves from losses if a bond issuer defaults.

--Editor: Jones Hayden

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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