Banks are shedding sovereign debt

These massive offloading operations have a perverse effect: they at the same time feed the distrust of the markets.

Will banks worsen the eurozone crisis? The question is worth asking as for several weeks, in a new movement, the big names of finance sell at a loss and in bulk, on the financial markets, sovereign debt stocks accumulated over the years.

As of June 30, the exposure of French banks to the sovereign risk of risky countries in the Eurozone amounted to 60 billion euros, of which 8 billion in Greece and 40 billion in Italy.

Since then, banks have reduced this exposure by selling securities and provisioning their accounts. BNP Paribas has reduced its exposure to eurozone debt by 20.7% in four months by selling 10 billion debt. Including 8.3 billion euros of Italian debt. These sales should help reduce the banking sector’s exposure to the risk of a state default, in the midst of the public finance crisis in the eurozone, as a new banking crisis threatens.


But these massive offloading operations at the same time feed the distrust of sovereign debt and fragile states of southern Europe, such as Greece, Italy or Spain.

Not only are banks feeding a sell flow, prompting other major creditors to sell – insurance companies, investment funds etc. – but they contribute to raising the borrowing costs of states in difficulty. On Wednesday, November 9, Italy’s ten-year borrowing rate peaked at 6.86%, a record since the creation of the euro.

“The sale of billions of euros of Italian debt, including that of BNP Paribas, has boosted the rate of the obligation to ten years in Italy, shows a close the European regulatory authorities. We should welcome the fact banks are cleaning up their balance sheets, but we are entering an infernal spiral, difficult to control. ” In fact, to reassure investors and stop the melting of their stock market, banks, especially French, have no choice but to get rid of their surplus government bonds. This is the only way to restore confidence and comply with the new regulatory constraints decided by European regulators.

In order to secure the banking system and make balance sheets more readable and secure, the European Banking Authority (EBA) now requires lenders to record their public debts at market value, while strengthening their equity by June 2012 … The equation is delicate in this period of tension on the debt market since the volatility of government securities has the mechanical effect of reducing capital ratios. It involves significant asset sales.
In France, the banks want at any cost to avoid a recapitalization of magnitude, on public funds or by a call to the market. On 27 October, the European banking regulator has estimated the capital requirements of the main French banks at 8.8 billion euros (BNP Paribas, Societe Generale, Crédit Agricole and BPCE) … A significant figure that should, however, be revised downward in the next YBE valuation expected before the end of the month, given the large volume of debt consolidation in recent weeks.

Refusing to be held responsible for a worsening of the debt crisis in the eurozone – as already heard Anglo-Saxon – French banks refer to regulators the responsibility of their choice to value the debts at market price in crisis.

Vicious circle

Above all, they believe they have been exemplary since the beginning of the crisis in Greece, having kept in their books the Greek securities, yet promised to a haircut, as requested by the government in May 2010.
“We have complied with the commitment made by Christine Lagarde (then Minister of the Economy) not to sell, which was not the case for German banks such as Deutsche Bank or Commerzbank. had to have the same injunctions, a banker argues.We are the only ones to have to assume such a cost for Greece! ”

When a country is the object of a bailout co-piloted by the International Monetary Fund (IMF), it asks the creditor countries, therefore their banks, to keep their debts, so as not to compromise the operation.

Could the partial withdrawal of banks from the debt market jeopardize the efforts of Europeans to save the eurozone?

For economists, the vicious circle could be broken by increased intervention by the European Central Bank (ECB).
“In the expectation of a credible political response, one solution would be for the ECB to face the market in a resolute and aggressive manner, to make massive purchases of debt, and thus to sell and speculate against the euro area. would be fought, ” said Rene Defossez, strategist at Natixis.