Bank exodus from euro zone sovereign debt quickens

Monday, November 7, 2011
By Paul Martin

By Steve Slater and Lionel Laurent

LONDON/PARIS (Reuters) – Banks including BNP Paribas and ING are ditching billions of euros of euro zone government bonds, cutting their exposure to the region’s trouble spots.

More lenders are expected to retreat as the euro zone crisis deepens and leaders raise the possibility of the exit of Greece from the bloc, further damaging prices.

“The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds,” Charles Dallara, managing director of the Institute of International Finance, warned on Wednesday.

BNP, the biggest overseas private holder of Greek government debt, took a 2.6 billion euro writedown on Thursday as the crisis in the currency bloc deepened, mostly because it wrote down the value of its Greek bonds to 40 percent of par value.

The bank had been told by the French government not to sell down its Greek bonds as the country’s troubles grew over the summer, to prevent destabilising the euro zone, a senior banking source has told Reuters, on condition of anonymity.

BNP lost 362 million euros in the third quarter and said it will lose another 450 million euros in October from selling almost 25 billion euros of sovereign debt, or a quarter of its holdings, reducing its Italian bonds by 8.2 billion euros to 12.6 billion euros over the four months.

The retreat is not restricted to those economies seen as most vulnerable to the crisis.

In addition to cutting back on 2.2 billion euros of Spanish sovereign bonds (leaving 0.5 billion euros), BNP also reduced its French debt holding by 1 billion euros (leaving 13.8 billion euros) and its German debt by 1.4 billion euros (leaving 2.5 billion euros).

In a similar move, Dutch financial group ING said it had cut its Greek, Italian, Irish, Portuguese and Spanish sovereign bond holdings by 5.4 billion euros, also in the last four months.


The IIF, which represents over 450 financial firms, half of them in Europe, said in a letter to G20 leaders ahead of their summit in France that the sales of government bonds were the result of banks being hit by tougher capital and liquidity rules — including their “increasingly questionable emphasis on sovereign debt”.

Regulators have encouraged banks since the 2007/08 financial crisis to increase their holdings of liquid assets such as government bonds and cash, so they could withstand at least a 30-day funding crisis.

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