Slowly even those staunchest critics of reality, namely undercapitalized and insolvent French banks, are coming to grips with the truth that they are going to see massive losses on their tens of billions of French debt exposure. The FT reports that the French stock market regulator has told French banks to apply realistic assumptions to their Greek debt haircuts. Because through today, French banks only used the 21% agreed upon haircut at the July 21 (and even that number is likely greatly overstated). So where are Greek bonds trading now? Oh about 30 cents on the dollar (70% haircut) , which means at the end of the day French banks will see about three time more losses on Greek holdings than provisioned. And the market, which is not all that stupid, knows this and has been punishing French banks. This is precisely what regulators are trying to avoid. The problem, as is well known courtesy of daily fruitless discussions between Sarkozy and Merkel, is that "French banks have more cross-border exposure to Greece than any other country, mainly through subsidiaries owned by Crédit Agricole and Société Générale. BNP Paribas holds the most Greek sovereign bonds among private sector investors, with €4bn of exposure...French banks argued that limiting themselves to 21 per cent was justified because trading in Greek government debt was so subdued, making market prices unreliable." Uh, what? Those billions in Greek bond volumes, where the 1 year yields 184% in dozens of daily trades, are "subdued" and "unreliable?" Why not just buy the bonds then and take advantage of the illiquid arb then? What's that? Crickets? Oh ok. In the meantime, what is certain is that after the ECB, France is the country most exposed to a Greek admission of reality (even truncated, assuming a 60% haircut which is still generous). Which of course confirms, once again, our thesis that the only source of EURUSD stability in the past two weeks have been French banks liquidating assets, and using the feedback loop of rising asset prices from FX EUR repatriation to sell even more to a willing market.
Per the FT:
Controversially, the 21 per cent “haircut” envisaged for private sector bondholders as part of the rescue package had been used as a benchmark for losses by various French banks and some insurers when they reported their results for the first half of 2011.
In sharp contrast, some rivals in other countries – such as the UK and Germany – had recognised much heavier losses of about 50 per cent on their “available for sale” Greek government bonds, in line with distressed market prices.
The AMF confirmed that it had sent the letters, without releasing a copy. It said the letters had argued that the July bail-out was “jeopardised” and that the 21 per cent haircut was “now perceived as insufficient”.
Following their less aggressive approach to Greek sovereign debt writedowns, shares in French banks suffered in August when fears about eurozone debt contagion among peripheral countries escalated.
Many analysts expect the banks to take a bigger haircut when they report their third-quarter earnings next month. BNP Paribas has already said that a 55 per cent impairment would lead to a provisioning of €1.7bn, on top of the €534m taken at the end of the first half.
Sorry, if it was only €1.7 billion, BNP and be extension, Sarkozy, would not bring the Eurozone to the brink of disaster every single time a haircut of more than 21% was demanded to enact the EFSF and the Greek PIP. After all, it is these banks' own survival tha demand the free recap money (however insufficient) that the EFSF would provide. Banks know this, and thus it makes no sense that the amount in question is so de minimis.
Or, if it is, then things are truly scary in Europe, where massive financial corporations apparently have absolutely no way to raise an amount of capital that is a fraction of a percent of their total "assets."