By Gareth Gore and Spencer Anderson
Fri Nov 11, 2011 6:33pm EST
LONDON, Nov 11 (IFR) - European banks are planning to dump more of the 300 billion euros they own in Italian government debt, as they seek to pre-empt a worsening of the region's debt crisis and avoid crippling write downs - a move that could scupper the European Central Bank's efforts to bring down soaring yields.Still reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same mistake twice. Then, under the pressure of governments and a hope that credit default swaps would protect them against heavy losses, they held on until it was too late to sell.
With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe's largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support.
"Our traditional buying days are no longer," said one board member at a European bank, one of Italy's 10 biggest creditors, who added that the bank has also sold off previous bond purchases. "Unless there is more certainty on Italians changing direction, it will be very tough for them to find buyers."
Banks are important creditors to Rome, having bought about 40 percent of the 22 billion euros Italy issued in euro-denominated syndicated bonds since 2009. According to the European Banking Authority, the region's biggest 90 banks held 326 billion euros of Italian debt at the end of last year.
Many banks have since reduced their holdings, although the EBA numbers - released in July - are the most up-to-date cross-industry figures on nominal holdings. Italy's debt load totals around 1.7 trillion euros, with more than 300 billion due to mature next year alone.
NO POINT WAITING
"You're better off doing it now rather than waiting," said one investment banker who is currently working on plans for bank clients to further sell down their Italian bond holdings. "It's better to take the losses now when everyone is expecting it rather than wait around for a default."
The ECB has been buying Italian bonds to keep down yields since August. Since then, the institution has bought about ?110bn of European government debt, some of which traders say is Italian debt. Most sales have been and will be on the open market.
"The market is still as liquid as hell for those that want to sell," added a senior banker at one non-European bank. "We managed to sell off half of our holdings in one morning."
The sheer volume of such sales will make it increasingly difficult for the ECB to keep Italian bond yields down. The yield on 10-year governments bonds surged as high as 7.5 percent this week, the most in the history of the eurozone and the highest for Italy since 1997. Selling intensified after LCH.Clearnet lifted its margin requirements on Italian debt. The 10-year Italian bonds currently trade at 85 cents on the euro.
Foreign banks are likely to be the biggest sellers, say bankers advising on the holdings. EBA stress tests showed that in December half of Italy's 10 biggest European bank creditors were foreign: BNP Paribas held 28 billion euros in bonds, Dexia 15.8 billion euros, Commerzbank 11.7 billion euros, Credit Agricole 10.8 billion euros and HSBC 9.9 billion euros.
Most of those banks have since reduced their exposure - either through outright sales, short positions or hedges - although direct comparisons are difficult because most banks only detail their net exposures. Still, in the four months to the end of October, BNP Paribas cut its Italian exposure by 8.3 billion euros, while Commerzbank cut its exposure by 1.8 billion euros in the first nine months of the year.
"I think what you are seeing right now is a lot of the short-dated stuff is being sold," said Eric Strutz, chief financial officer at Commerzbank, on a recent call with analysts. "Do we expect another 2 billion euro reduction in Q4? Right now, we're looking into that."
Other sellers include Societe Generale, which this week said it had halved its Italian net exposure since June to 2.5 billion euros. Barclays, meanwhile, has reduced its net exposure to Italy by more than 1 billion euros during the same three month period.According to people close to some of the bank disposals, the efforts of the European authorities to ensure that a Greek debt restructuring would not trigger CDS payouts has driven much of the bond selling. Unable to confidently hedge their exposures, many are choosing to sell - even at a loss.
Italian bonds still have one support bloc. Domestic banks appear to be holding on to their much larger holdings. As of last December, EBA stress tests showed Intesa Sanpaolo held 60 billion euros of Italian debt. UniCredit and Banca Monte dei Paschi di Siena held 49 billion euros and 32 billion euros respectively. Recent results indicate that those holdings have changed little.
"We will keep investing the largest part of our liquidity in Italian government bonds," said Corrado Passera, chief executive officer at Intesa Sanpaolo, in a call with analysts this week. "We believe they provide the right yields vis-à-vis the cost. So no policy change on our side."
Still, according to the investment banker advising firms on their Italian holdings, the domestic banks' decisions to hold on could have more to do with their inability to offload such large amounts quickly and without deep losses. Indeed, some Italian bankers seem resigned to the situation.
"We feel that fears of a default are greatly overdone, but the market psychology is what it is," added an executive board member at another large Italian bank, which is also holding onto its bonds. "Lots of players do not want to buy them. They think it is better to sell if you have the opportunity to."
Capital concerns are also preventing them from selling. "The key issue is on solvency and I think they made a mistake in requiring us to hold more capital," said the chief executive of a mid-sized Italian bank. "To meet these levels we cannot sell too much of our sovereign debt." (This story is to appear in the November 12 print edition of the International Financing Review - www.ifre.com