14/9/11 - Crisis deepens: European banking system on the edge of an abyss

PARIS – Where now for European banks? Sir Howard Davies, former chairman of Britain’s Financial Services Authority, said on BBC Radio’s Today program on Tuesday morning that he thought the French government was only days away from having to recapitalize the country’s banking system for a second time. Italy had to pay the highest spread since joining the euro to sell its bonds on Tuesday. There are growing fears over whether Europe’s largest borrower can stay the course. The Eurozone sovereign debt crisis is meanwhile exacting a devastating toll on the European banking system as a whole, the UK included. With their high exposure to Eurozone debt, the problem is particularly acute for the French banking goliaths, BNP Paribas and Societe Generale. BNP alone has a Eurozone sovereign debt exposure of some €75bn, amounting to roughly 6pc of total assets, including €14bn of Greek debt and €21bn of Italian government bonds. And that’s just BNP. The other two major French banks, SocGen and Credit Agricole each have exposures of a similar order of magnitude. Collectively, French banks have €56bn of Greek sovereign bonds alone. They’ve so far only written down this Greek debt by around 20pc, or in line with the restructuring agreed at the time of the last bailout. That’s nowhere near mark to market. In the increasingly likely event of Germany kicking the Greeks out of the Eurozone altogether, Greek debt will become close to worthless. Greece is already effectively a cash only economy. Most forms of credit has effectively dried up, the Greek banking system is finished, and capital controls to prevent what little money that remains from leaving the country are surely only a matter of time. European banking must prepare for the worst as far as Greece is concerned. As for the remainder of the Eurozone sovereign exposure, there’s been no write down at all among banks on these bonds. If there’s a wider problem of default, the bad debt recognition has yet to come.-Telegraph

Disaster looms if Greece defaults: International alarm over Europe’s debt crisis hit new heights on Tuesday, with President Barack Obama pressing the bloc’s big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy. “I think there is a possibility, if the wrong steps are taken, that the system goes off the rails,” Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro’s survival was at risk. Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets. Her economy minister said earlier this week that there should be no taboos in stabilizing the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone — a move Citigroup’s chief economist warned would lead to “financial and economic disaster.” “As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area,” Willem Buiter said in a note published on Tuesday. –Reuters

Crisis could unravel markets across the world: We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the U.S.” The World Bank and the IMF meet Sept. 23-25 in Washington as European officials work to keep the currency union from unraveling while weighing whether to allow Greece to default. French banks have become a focal point because of their holdings of bonds issued by the euro region’s most-indebted nations, topping the list of Greek creditors with $56.7 billion in overall exposure, according to a June report by the Bank for International Settlements. “The light should be flashing yellow, if not red, in Washington, D.C., and hopefully the IMF meeting can be the catalyst for getting to a common analysis and setting the stage for the G-20,” El-Erian said from Pimco’s Newport Beach, California-based headquarters. –Business Week