French banks on front line of Italian risk
PARIS — French banks, including BNP Paribas and Credit Agricole, have the most at risk from the euro-region’s debt crisis infecting Europe’s largest borrower, Italy.
At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel, Switzerland-based Bank for International Settlements. That’s the most for financial institutions from any foreign country and more than double held by German lenders.
“They’re on the front line,” said Julian Chillingworth, who helps manage about $25 billion at Rathbone Brothers in London. “French banks like BNP Paribas have taken substantial positions in Italy when the market opened up to foreign players and now they face the downside.”
Italian stocks and bonds have been roiled on concerns about the country’s ability to trim debt after warnings by Moody’s Investors Service and Standard & Poor’s and infighting in Silvio Berlusconi’s government over a budget-cutting plan. Italy’s woes may overshadow efforts to fix Greece’s finances, which have left European policy makers struggling to find a strategy that won’t spark a regionwide debt panic.
Italy, whose $2.23 trillion of bonds outstanding is the largest debt load in Europe and behind only the United States and Japan, had avoided being sucked into the financial crises engulfing Greece, Ireland and Portugal. Confidence eroded after both Moody’s and S&P in the past two months said they were reviewing ratings for Italy and its banks.
Italian stocks entered a bear market on July 11, defined as losses of more than 20 percent from a previous high, and 10-year Italian yields reached the highest in 14 years. Stocks recovered and yields on 10-year Italian notes retreated from a euro-era high of 6.02 percent after the completion Tuesday of an auction of $9.5 billion of Treasury bills and Berlusconi’s reassurances on hastening the passage of a $56 billion deficit-cutting plan.
“These are positive signs, but it would be better to anticipate markets rather than to react to them,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “It’s as if politicians got down on their knees before the markets.”
Pascal Henisse, a spokesman at BNP Paribas in Paris, Credit Agricole’s spokeswoman Stephanie Ozenne and Societe Generale’s spokeswoman Astrid Brunini all declined to comment on the turmoil in Italy and its impact on their banks.
About 45 percent of Italian debt held by foreign banks is carried by French institutions, according to BIS data.
French banks’ Italian debt holding is more than their combined exposure to Spain, Portugal, Ireland and Greece, which stood at $253.8 billion at the end of 2010, according to BIS data. The lenders had $97.6 billion in Italian sovereign debt at the end of the year, dwarfing their $57.5 billion of such debt from the four other countries, the data show.
Drawn by the lucrative financial industry in Italy, French financial companies spent at least $28 billion since 2006 to buy banking and insurance assets in the euro-area’s third- largest economy.
BNP Paribas and Credit Agricole, France’s second-largest bank, bought two of Italy’s 10 largest lenders. At the end of 2010, BNP Paribas held more Italian than French sovereign debt.
Investors’ concerns about commercial and sovereign debt held by BNP Paribas and Credit Agricole in Italy may be mitigated by the overall funding capacities and deposits base of the French banks, analysts and investors say.
“When you break down the exposures into their major components, the asset quality implications do not seem as negative as the share price movements often indicate,” said Matthew Czepliewicz, an analyst at Collins Stewart in London. “Do recent sovereign debt movements change something in the quality of BNL’s lending book? Probably not.”
Also, the fears of a contagion may be overblown, the Collins Stewart analyst said.
“The question is if an Italian contagion would be fundamentally grounded or is just panic,” he said. “My sense is: it is just panic.”
Italy has “big advantages” over other southern European nations as it has low foreign debt, a primary budget surplus, long debt maturity and lack of a housing-market “bubble,” a team of strategists at Credit Suisse Group led by Andrew Garthwaite in London wrote in a report Tuesday.
Those advantages may matter little in a market gripped by panic, and may require European leaders to act firmly and quickly, some investors said.
“We’ve seen fever spikes,” said Valerie Cazaban, who helps manage $141 million at Stratege Finance in Paris and holds shares in BNP Paribas. “European policy makers should contain it as soon as possible before the illness bursts out.”