Europe’s Banks, Insurers Take Greek Debt Hit in Stride

By and | July 22, 2011

Major European banks have limited their losses on Greek bonds to just over €5 billion [$7.2 billion] after negotiating a 21 percent haircut on their debt holdings as part of a rescue plan.

France’s BNP Paribas is set to take the biggest hit of around €950 million [$1.366 billion], as the largest holder of Greek government debt outside the country.

There was relief among investors that the loss was not more severe and reduced the threat the euro zone crisis will spread to Spain and Italy after Thursday’s late night rescue deal, which will see the private sector contribute €37 billion [$53.2 billion].

“The danger of an uncontrolled (Greek) default is gone. That does not mean that everything is well, but only that a catastrophe has been avoided,” said Allianz Global Investors fund manager Oliver Flade.

“A 40-50 percent haircut would have made economic sense. But between banks, which wanted zero, and politicians, who wanted significantly more, a consensus of 21 percent was found. For banks this is better then what they could expect.”

The hit to European insurers could be of a similar size as banks, as the industry held €24 billion [$34.5 billion] of Greek sovereign debt late last year, but their exposure is less clear than banks, who were forced to reveal detailed information on holdings as part of last week’s industry health check.

That signaled non-Greek banks face a €5.4 billion [$7.77 billion] loss.

The threat of further losses contagion remains. Greek bonds were trading at prices implying a 45 percent haircut, improving from over 50 percent last week.

“We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65 percent,” said Gary Jenkins, head of fixed income research at Evolution.

By 1240 GMT the STOXX Europe 600 banking index was up 0.1 percent, pulling back from an early 2.6 percent rally. The index jumped 4 percent on Thursday as a Greek deal neared. The STOXX Europe 600 insurance index was flat.

Four options are being offered to creditors, including bond exchange and rollover offers as well as a bond buyback scheme.

The change in the terms on Greek bonds prompted Fitch to say it will declare a selective default, and other ratings agencies are likely to also announce downgrades.

Shares in Greece’s banks jumped 9 percent. Other gainers included firms that have been hit hard by the threat the Greek crisis could spread.

Belgian-French Dexia, Germany’s Commerzbank, France’s Credit Agricole and Britain’s Barclays all gained over 1 percent.

The Institute of International Finance (IIF), which led talks for private investors, reckons 90 percent of creditors will sign up. Deutsche Bank, HSBC, BNP Paribas, Allianz and AXA are among the firms to already support it.

Holders of Greek debt who were not on the IIF’s list of firms in support included Royal Bank of Scotland, Unicredit, Credit Agricole and Ageas.

The offer is voluntary, raising the possibility that some investors, such as hedge funds, will not participate and wait to be repaid at par.

There is about €150 billion [$215.7 billion] of outstanding Greek sovereign debt held by the private sector, so a 90 percent take-up would account for €135 billion [$194 billion], including about €54 billion [$77.65 billion] in the period up to mid-2014.

The net contribution of the private sector is the gross contribution of €54 billion [$77.65 billion], minus the cost for Greece to service the new 30-year debt instruments.

Europe’s banks held €98 billion [$141 billion] of Greek debt at the end of last year, with two-thirds of that in domestic hands. They will be recapitalized under the rescue plan, with about €15 billion [$21.57 billion] likely to be pumped in, on top of €10 billion [$14.38 billion] already earmarked for them.

BNP Paribas, which holds €4.5 billion [$6.47 billion] of Greek bonds in its banking book, is followed by Dexia and Cyprus’s Marfin , who each hold about €3.4 billion [$4.89 billion], indicating a hit to each of over €700 million [app. $1 billion].

Commerzbank held €3 billion [$4.3 billion] in its banking book and Société Générale held €2.4 billion [$3.45 billion], so they face haircuts of €630 million [$906 million] and €500 million [$720 million] respectively.

German banks, which could suffer a €1.9 billion [$2.73 billion] hit from their holding of 9 percent of Greece’s debt, can absorb the hit, a bank lobby group there said.

Insurers with the biggest gross exposures are Italy’s Generali with €3 billion [$4.3 billion], France’s CNP Assurances with €2 billion [$2.87 billion] and Allianz of Germany with €1.3 billion [$1.87 billion], according to Barclays Capital.

“It does appear to be quite helpful that they’re minded to confront contagion as much as they’re minded to help Greece. That’s probably the win for the insurance sector here,” said Barclays Capital insurance analyst Toby Langley.

(Additional reporting by Sudip Kar-Gupta in London, Michel Rose in Milan and Arno Schuetze in Frankfurt; Ingrid Melander in Athens; Editing by Mike Peacock)

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