A Divide Over Valuing Greek Debt

Dexia, BNP Paribas, and Société Générale are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

Most banks, including HSBC, Europe’s largest bank by market value, and Royal Bank of Scotland, have reduced the value of Greek holdings to reflect market prices, a decline of as much as 51  percent. At the same time, BNP Paribas and Société Générale of France and Belgium’s Dexia cut the value of Greek bonds in their trading portfolios by 21  percent. The banks say the valuations don’t violate accounting rules, though they may mean the banks will take a bigger hit if Greece defaults or European governments force banks to accept more losses as part of a Greek bailout. The three are among the largest foreign holders of Greek government bonds. “It’s no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns,” says Peter Hahn, a professor of finance at London’s Cass Business School. “You’ve got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system.”

Further writedowns of Greek sovereign debt would add pressure on the banks to raise capital to meet regulations set by the Basel Committee on Banking Supervision. Meanwhile, the sovereign debt crisis is driving down most banks’ shares and raising the cost of insuring their bonds against default, making any fundraising costlier. Société Générale stock dropped 55  percent this year through Oct. 4, while BNP Paribas’s sank 43  percent and Dexia’s fell 59  percent. The 46-member Bloomberg Europe Banks and Financial Services Index is off 36  percent. France and Belgium, which bailed out Dexia in 2008, have pledged to support the bank and are discussing plans to restructure it.

As European leaders sought to provide a rescue package for Greece in July, the Washington-based Institute of International Finance (IIF), which lobbies for financial companies, reached a provisional agreement for lenders to participate in a voluntary exchange and debt-buyback program with the Greek government. Banks that participated in the deal would be accepting an estimated 21 percent reduction in the value of their Greek debt maturing before the end of 2020. Dexia, BNP Paribas, and Société Générale say the IIF agreement justifies their reducing the value of those Greek bonds by 21  percent, even though market values are much lower. “The French banks ultimately took a view that suited their own interests, and while it may seem pretty extraordinary, they have followed the letter of the law,” says Richard Murphy, an accountant and director of Ely (England)-based Tax Research.

Some European leaders, particularly in Germany, are now pushing banks and insurers to accept bigger losses than the proposed 21  percent to reflect the worsening of the crisis. Otmar Issing, a former European Central Bank chief economist, is calling for a 50  percent write-off. Patrick Armstrong, managing partner at Armstrong Investment in London, which oversees $345 million, says he expects the write-off to be about 40  percent. And after chairing a meeting of European finance ministers in Luxembourg on Oct. 3, Luxembourg Prime Minister Jean-Claude Juncker said: “As far as private-sector involvement is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21.”

Greece “is not an issue” for Société Générale, Chief Executive Officer Frédéric Oudéa said on a Sept. 12 conference call with reporters. Laetitia Maurel, a spokeswoman for the bank, says: “We indicated in our second-quarter results that this 21% writedown was in line with market valuation at June 30 given the short-term maturities of our portfolio.” She says that as a result of bonds maturing since then, the second-quarter writedown represented 35 percent of the bank’s Greek sovereign bond portfolio as of Sept. 9. At BNP Paribas, its Greek debt “exposure of €3.5 billion is smaller than first-quarter pretax earnings,” says Paris-based spokeswoman Carine Lauru. Dexia executives declined to comment.

The price of Greek 10-year government bonds has tumbled to 41.5¢ on the euro as of Oct. 3, from 66.2¢ at the start of the year, Bloomberg data show. Greek five-year debt was trading at 42.7¢ on the euro, from 62.8¢ on Jan. 3. The price of credit-default swaps—insurance on bonds—signals that there’s a 91  percent likelihood that Greece will default in the next five years.

The European Securities and Markets Authority, the Paris-based umbrella group for European financial regulators set up in 2010, and the International Accounting Standards Board are pressuring national regulators to force banks to mark holdings to market. It’s very important that banks “are consistent in their valuations of sovereign debt exposures,” Steven Maijoor, ESMA’s chairman, said in a Sept. 29 speech in Vienna. “Lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks. A lack of transparency from banks on their exposures to sovereign debt and related instruments is generating new suspicions.”

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