Banks Shed European Exposure

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.

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"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 2.4 billion euro writedown on Thursday as the crisis in the currency bloc deepened, mostly as a result of its holding of Greek bonds.

The bank had been told by the French government not to sell down its Greek bond holding 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.

France's biggest bank took a 2.1 billion euro hit on writing its Greek government debt down to 40 percent of its par value.

But in also lost 362 billion euros 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 in just 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), BNP also reduced its French debt holding by 1 billion euros (leaving 13.8 billion) and its German debt by 1.4 billion euros (leaving 2.5 billion).

Meanwhile, in a similar move, Dutch financial group ING said on Thursday 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 Cannes 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".

Buyers of the bonds could include hedge funds, although the European Central Bank is expected to be by far the biggest buyer in the secondary market. BNP Paribas said all its sales of Italian debt had been on the market and not to the ECB.

Hedge funds were definitely involved in Greek debt now, especially shorter maturity, according to a person who trades distressed-style debt, mainly for hedge fund clients.

Barclays last week said it had cut its sovereign exposure to Spain, Italy, Portugal Ireland and Greece by 31 percent in the third quarter to 8 billion euros, mostly by selling the bonds.

BNP's residual exposure to Greek sovereign bonds was now 1.6 billion euros. It said that a deal whereby private sector investors will voluntarily lose half the nominal value of their Greek bonds was "still shrouded by uncertainty".

ING took a 467 million euros hit as it marked its Greek government bonds to market value, which is currently around a 63 percent loss.

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