Posted on: 21/Apr/2011
A Greek debt restructuring might only cost a handful of French and German banks a few hundred millions euros each, but could undermine this summer's health check of European lenders.
BNP Paribas, Dexia, Societe Generale and Commerzbank are among the biggest holders of Greek bonds, each with 3 billion euros or more.
Pressure is growing on Athens to deal with its mountain of debt and financial markets are betting some form of restructuring is on the cards. A German government adviser said it was unavoidable.
"It might cause pain to individual banks but the system can withstand what could potentially happen in Greece," said Ajay Rawal, senior director for financial industry advisory services at restructuring advisor Alvarez & Marsal.
"What will be more difficult is the uncertainty it would bring ... where does it lead to and where's next? Everyone's very wary of what precedents it might set."
Greece's debt load of 325 billion euros is nearly double the level regarded as sustainable and about half needs to be written off, economists estimate. That could see "haircuts" on the value of holdings of between 20 and 50 percent, analysts reckon.
What will happen is far from clear, however. Many EU officials maintain a restructuring is not on the agenda, especially before 2013, ruling out the threat of sharp haircuts in the short term.
A voluntary rollover of outstanding debt, extending repayment maturities or a mild restructuring are possible and would be less painful.
"Extensions are potentially the least damaging for the banks," said Nick Firoozye, head of EMEA rates strategy at Nomura. "They don't lower the debt ratio, they're not necessarily that great for Greece but as a first stage they help to smooth the debt profile."
But they could be costly, forcing banks to mark-to-market all their Greek bond positions. Trading book assets have already been marked down and loan provisions have typically been bumped up, but banking book assets are not adjusted for market swings.
About two-thirds of Greek government debt is held overseas, with a big slug in the hands of European banks.
Banks also hold private sector bonds and loans to private firms and the fear is a restructuring will drive defaults up.
French banks are most exposed, even after reducing their holdings in the last year. They had 19.8 billion euros of government bonds and 42.1 billion euros of loans to the private sector, excluding other banks, at the end of September, according to the Bank for International Settlements.
A one-third haircut could cost BNP Paribas 1.6 billion euros on its 5 billion euro of Greek government bonds, and cost SocGen and Franco-Belgian Dexia about 1 billion euros each on their sovereign holdings. A 50 percent write-down would wipe off 12 percent of BNP's expected earnings this year, and 22 percent at SocGen, analysts at RBS estimated.
Credit Agricole had modest exposure of near 600 million euros, but has over 20 billion euros of loans to the country, as it owns Greek bank Emporiki.
German lenders held 26.3 billion euros of government bonds at the end of September and had 10 billion euros of exposure to the private sector.
The big worry is the precedent a Greek default would set.
"The aftershock depends a little bit on whether a restructuring is considered to be a heavy touch -- then it will potentially have large-scale contagion effects," Firoozye said.
European banks' exposure to Greece was 154 billion euros at the end of September, easily surpassed by their exposure to other trouble spots like Ireland (565 billion euros of loans, led by German and British banks); Portugal (216 billion euros); and Spain (727 billion euros).
If Greece restructures, "such a U-turn could go down negatively with markets and could unsettle progress in Ireland, Portugal and Spain," said Deutsche Bank analyst Mark Wall.
"The willingness of private investors to recapitalize euro area banks -- both periphery and core -- could decline, reinforcing contagion," Wall said in a note.
With European banks potentially needing to raise over 40 billion euros this year, that would be a worry.
It could also be a blow to this year's "stress test" of 90 banks across Europe.
The test has already been criticized for repeating last year's flaw -- that it will not apply a haircut to sovereign debt held in banking books. That's because the EU has said it's inconceivable that one of its member states would default or have to restructure.
If Greece can't avoid such a scenario, analysts said, the test's credibility could be fatally hit -- undermining the objective of the test to restore investor confidence in banks.
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