French Banks Hold $93B In Greek Debt As Sarkozy Announces Rollover Deal

27/6/2011

In a transcendental week for Greece and the European Union, French President Nicolas Sarkozy announced a debt rollover plan agreed with French banks that could provide the framework for a larger, international plan aimed at giving the debt-ridden peripheral nation some breathing space.  With substantial exposure to Greek debt, French banks are the most in trouble in case of a default, an option, experts believe, markets and policymakers will avoid.

Sarkozy’s reported debt rollover agreement with French banks consists of a 70% reinvestment of the proceeds from maturing Greek bonds over the next three years.   Having cashed out on 30%, banks would put 50% of those proceeds into new 30-year bonds, with the remaining 20% going into zero-coupon, AAA-rated bonds with deferred interest, according to Reuters.

These bonds would be placed in a special purpose vehicle (SPV) in order to ring-fence them and both mitigate risk as well as take them off banks’ balance sheets.  French banks have the greatest exposure to Greece, with €65 billion ($93 billion) in liabilities as of the end of the fourth quarter, according to data from Standard Life Investments; Greek banks held about €59 billion ($84 billion) in their country’s sovereign bonds.  German banks hold about €40 billion ($57 billion) in Greek government bonds while British banks have about €19 billion ($27 billion).

“[In the case of a default], French banks would take a big hit, but would be able to survive,” explained Frances Hudson of Standard Life Investments.  “There would be a run on Greek banks, which would survive only through government support,” said Hudson, adding “but the government is also bust, so support will necessarily come from the EU and the IMF.” (Read Voluntary Greek Debt Restructuring Still Constitutes Default, S&P Says).

Exposure to Greek debt is large and highly concentrated, according to research by Barclays Capital.  While the European Central Bank is the largest individual creditor, with about €49 billion ($70 billion) Greek bonds on its balance sheet, “ the top 10 names account for 50% of holdings, the top 30 for 70% and the top 40 for close to 72%.”

BNP Paribas is the  foreign bank with the largest exposure to Greece, holding about €5 billion ($7 billion) on its balance sheet.  Dexia, a French-Belgium-Luxembourg operation, comes second with €3.5 billion ($5 billion), with Italy’s Generali and Germany’s Commerzbank trailing it closely, with €3 and €2.9 billion each respectively.  Other large foreign financial institutions with substantial exposure include France’s Societe Generale (€2.9 billion), Axa (also French, €1.9 billion), Deutsche Bank from Germany (€1.6 billion), and the Royal Bank of Scotland (€1.1 billion). (Read Trichet Warns of Greek Systemic Risk).

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