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Banks Brace For Hits on Greek Bonds

Banks across Europe are braced to take as much as 17 billion euro ($24.5 billion) of writedowns on their holdings of Greek sovereign debt within a matter of days.

German Chancellor Angela Merkel and French President Nicolas Sarkozy.
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German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Even before politicians sat on Thursday to thrash out the terms of the second Greek bail-out, auditors had been warning bank finance directors that they would have to make provision for losses on their bonds with their second-quarter results, beginning next week.

Auditors have argued that the banks must take the hits now, given that almost any scenario for dealing with Greek sovereign restructuring will impair the value of their bond holdings.

After the Greek banks, French and German banks and insurers are the biggest holders of Greek sovereign debt. Deutsche Bankand UBSkick off the mid-year reporting season in Europe next Tuesday, with the French banks due the following week.

Up until now, most banks have not written down the value of the bulk of their Greek sovereign bonds. Bonds can be held in two buckets on banks’ balance sheets: trading books, which routinely mark the value of bonds to market, only hold a fraction of banks’ sovereign bond investments; the balance is in so-called banking books, which are routinely held to maturity and are therefore not traditionally marked to market, ignoring plunges in bond values as a result.

Of the 82.7 billion euro in aggregate net exposure to Greek sovereign debt revealed in last week’s European stress tests, just 3.9 billion – or less than 5 percent – is held in banks’ trading books, according to an analysis by the Financial Times.

Nearly 79 billion, however, is held in institutions’ banking book assets, which are not adjusted for swings in market value. A 21 percent writedown or “haircut” on Greek sovereign debt held in those portfolios would trigger losses of nearly 17 billion across the 90 banks surveyed in this year’s widely discredited tests. European officials have discussed de facto haircuts of 15-20 percent on average as part of the bail-out plan.

Greek banks, which hold about 47 billion of Greek sovereign debt in their banking books, would be hit the hardest, suffering losses of more than 9 billion.

BNP Paribas , the French bank that holds more than 4.5 billion euro worth of Greek debt in its banking book, would have to write off 900 million euro. Other banks with significant banking book exposure to Greece include Belgium’s Dexia, with holdings of 3.5 billion euro, France’s Société Générale , with about 2.4 billion, and Deutsche Bank, which holds 1.3 billion, according to the FT’s analysis.