May 25, 2011
European banks remain saddled with almost €100bn of Greek government debt they can’t sell, hedge or ignore, after a number of recent deals to offload the exposure to reduce the impact of a possible default ended in failure, according to bankers involved.
The deals have been thwarted by a lack of willing buyers for the debt – even at record low prices – and that exposed lenders have been unable to buy protection because of the high costs, with top bankers advising their clients all they can now do is cross their fingers and hope for the best.
“The vast majority of these banks have just been unable to do anything,” said one European banker who has advised dozens of such banks. “Protection is too expensive, and markets for these bonds are illiquid, so many are riding out the problem. Right now, all they can do is shut their eyes and hope.”
Greek domestic banks are by far the biggest holders of the country’s bonds with some €50bn of exposure, according to a handful of estimates. But another €50bn is held at banks outside the country, with German banks alone exposed to around €19bn of the paper, while French banks hold another €15bn.
Fitch Ratings said on Wednesday that it sees high potential contagion risks from any restructuring of Greek debt. In a report on the German banking industry, Fitch said there would be a “sharp increase in general capital market and creditor risk aversion” if such an event were to take place, but added that it does not envisage ratings action on the lenders.
“For a lot of banks, their worst nightmare seems to be coming true,” said another investment banker who advises financial institutions on the continent. “We now know that the Greek smoke was indeed fire and a lot of people have now found themselves heavily exposed.”
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