French banks lead exodus of EU lenders from hardest-hit European economies

Guardian

French banks are cutting their exposure to the
hardest-hit EU economies, despite finance
minister Christine Lagarde, above, insisting that the
sector remains rebust.

European banks increase pressure on Greece and other struggling economies by refusing support for business deals

The crisis enveloping Greece, Ireland and Portugal appeared to deepen after figures showed EU banks were refusing to support business deals in the EU's hardest-hit economies.

Figures from the Bank of International Settlements (BIS) show French, German and UK banks have embarked on a mass exodus from Greece, Portugal, Spain and Ireland, in what analysts see as an effort to bolster their balance sheets and conform to new rules designed to protect financial institutions from going bust.

The move is expected to add to tensions in Brussels over how to prevent Greece defaulting on its loans because vital business contracts will cost more to insure.

French banks cut their exposure to Greece from $92bn (£57bn) to $65bn in the last three months of 2010. They also reduced their involvement in Ireland, Portugal and Spain, slicing their total exposure to the four hardest-hit economies by $112bn.

Richard Batty of Standard Life Investments said the reduction in credit derivatives issued by French banks was due to "the reduced risk appetite of the major banks, and in parallel, a shift to bolstering capital positions to reflect the requirements of the Basle III rules".

He said stress tests planned by Brussels for the summer could lead to a further exodus as banks sought to insure only the safest risks.

Banks are exposed to different countries through credit derivatives that insure business transactions, in addition to direct loans to governments and businesses, which are also recorded by the BIS.

Credit derivatives are typically sold to businesses wanting to insure transactions in the event that their suppliers or customers unexpectedly go bust. According to the BIS figures, a French firm wanting to sell goods and services in Greece or other peripheral EU countries is likely to be rebuffed by their own bank and be forced to look elsewhere for credit insurance.

French banks including BNP Paribas, Crédit Agricole and Société Générale are understood to have withdrawn from the Greek market to avoid the effects of Athens defaulting on its debts.

British and German banks have also reduced their exposure, though by a much smaller amount.

The figures are separate from previously disclosed numbers that show France remains the biggest lender to the Athens administration and businesses in Greece.

France has previously downplayed the effect of a Greek default. France's finance minister Christine Lagarde, who is currently campaigning to be head of the International Monetary Fund, has insisted the French banking sector remains robust and able to withstand further financial shocks.

However, she and her German counterpart, Wolfgang Schäuble, have been blamed for blocking a restructuring of Greek debt to maintain the solvency of their own banks.

Last week Schäuble reversed Berlin's previous opposition and put forward a restructuring plan that involved Greece's major private sector lenders, including banks. But he is understood to have met stiff opposition from Paris.

German and French banks held over two-thirds of the Greek government bonds at the end of last year, accounting for 70% of the $54.2bn owned by banks from 24 countries that report to the BIS.

French banks have a bigger overall exposure than any other country, mainly due to loans to the private sector. French banks had almost $40bn in loans to Greek companies and households, more than four times the exposure of German lenders, the BIS data show.

International loans to Greece stood at $161bn at the end of December, down $75bn from a year before.

BNP, which has almost $3 trillion of assets, refused to disclose how much it had reduced its exposure. A spokesman played down its involvement in Greece, Ireland or Portugal, saying that it had no retail operations in those countries.

Batty said: "The debate regarding the form of support for some of the southern peripheral economies hides the fact that achieving the appropriate economic adjustments remains highly problematic at present. This underlines our investment stance of not participating in these smaller bond markets."