BNP Paribas, along with UniCredit, have the largest net exposure to EU sovereign bonds - Photo... [+]
Europe is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in a partial breakup of the EU. With countries and institutions already ramping up contingency planning for a possible Greek exit, it might be a good idea to look at banks’ exposure to different peripherals and countries that could be in trouble to understand the risks of contagion.
Data compiled by Navigant shows that banks are highly invested in their own, domestic sovereign bonds. Major Spanish and Italian banks hold the biggest chunks of their credit portfolios in their own sovereigns, while French banks are more diverse, holding a wider selection of bonds. Among the top 20 European banks, exposure to France and the U.K. is substantial, while the U.S. bank with the largest non-U.S. sovereign exposure is Citigroup.
The latest Greek election results blew the lid off what had been a relatively calm European first quarter, putting upward pressure on Spanish and Italian bond yields. According to Navigant, Spain’s recent bailout of Bankia, the country’s fourth largest bank, is a “harbinger of things to come.” Banks were essentially saved a few months ago by Mario Draghi and the ECB through two big liquidity injections, dubbed LTROs. According to Navigant:
The ECB LTRO funds that created in large part the banks’ sovereign carry trade may not be working that well. With the spike in Spanish Sovereign Debt yields, it is likely that these trades are underwater and that additional margin calls are coming from the ECB on bank collateral suffering the same fate.
Exposure to European sovereign debt has been a major problem for firms in the financial sector over the last couple of years, even claiming a couple of victims like Jon Corzine’s MF Global. European banks' eerily high net exposure to EU sovereigns provides a first warning sign of things to come if the sovereign debt crisis takes a big turn for the worse.
Navigant’s data shows that both UniCredit of Italy and BNP Paribas of France are both sitting on more than €80 billion ($99.9 billion) each in net sovereign EU debt exposure. Almost all of UniCredit’s exposure is tied in Italian assets (about €50 billion, or $62 billion). BNP Paribas shows a more diverse portfolio, with about €20 billion ($25 billion) tied up in France, and a little more than €20 billion in Italy.
Big banks with between €60 and €70 billion ($75 to $87 billion) in credit exposure to EU sovereigns include BBVA, Intesa SanPaolo, ING Bank, Comerzbank, and the Royal Bank of Scotland.
Navigant’s data reveals that exposure to severely troubled sovereigns like Greece, Portugal, and Ireland, is limited. On the other hand, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, giving them systemic importance. French banks will suffer the risks of high exposure to Italy if things detriorate: beyond BNP Paribas, both Credit Agricole and Societe Generale reveal a substantial portion of their credit portfolio is parked in Italian sovereign debt.
Moving beyond the PIIGS, a major sell-off in French bonds would have a big effect on several of the most important banks in Europe. Groupe BPCE holds the highest number of French sovereigns on its balance sheet, at about €40 billion ($45 billion). HSBC, Deutsche Bank, Barclays, and RBS all hold between €10 and €15 billion ($12.5 to $18.7 billion) in French debt.
The interconnectedness of Europe’s financial system illustrates the risks of contagion. Fear over Greece, along with an ailing banking sector in Spain, pushed up Spanish and Italian bond yields, hurting banks that hold these assets. On the other hand, yields on French 10-years have gradually fallen since the beginning of the year, possibly providing some relief.
Jumping across the Atlantic, major U.S. banks still hold big positions overseas as well. Citigroup leads the way when it comes to net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet. JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley completes the podium with €5 billion ($6.2 billion); Goldman Sachs holds about €4 billion ($5 billion) in non-U.S. sovereigns.
Navigant’s data reveals that rising yields on European sovereign bonds are problematic beyond their effect on a nation’s borrowing costs. Europe’s banking sector has the potential to collapse if contagion gets out of hand, and, without an EU-wide deposit guarantee, the risk of bank runs is high. Analysts at Barclays suggest the ECB will wait until after the coming Greek elections to take action and try to calm markets, which could come in the form of a rate cut, and possibly the resumption of bond buying program SMP. Understanding the extent of internal sovereign exposure in the EU is key to understanding the risks of contagion, and the possible effects of policy.
