EU marks to fantasy

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Well I guess I shouldn’t be too surprised by this news given that it has been quite obvious for many months that the European banking system is in a far worse state than anyone has been saying. But the following is a bit embarrassing for Mr Trichet who only yesterday stated that “There is no liquidity or collateral shortage for the European banking system”:

In an unusual move, international accounting rule makers said some European banks haven’t taken big-enough write-downs on the value of the distressed Greek government debt they hold.

Some banks are using their own models to value their Greek bonds and other distressed sovereign debt when accounting rules dictate that they should be using market prices to determine the securities’ fair value, the International Accounting Standards Board said in a letter this month to the European Union’s chief securities regulator.

In some cases, using the “mark to model” approach, as opposed to “mark to market,” may have helped some banks to dodge potentially painful losses in recent midyear financial reports.

Banks are applying the rules on write-downs inconsistently, and that is “a matter of great concern to us,” IASB Chairman Hans Hoogervorst wrote in the letter to the European Securities and Markets Authority. The IASB, which sets the accounting rules used in Europe and much of the rest of the world, doesn’t usually comment on how its rules are applied, but the inconsistency prompted it to do so in this case, Mr. Hoogervorst said.

The report focusses mainly on French banks who seem to have come up with a novel way of deciding the value of their balance sheets:

“Market prices not representative of fair value,” France’s BNP Paribas executives said in an Aug. 2 investor slide presentation, citing “the illiquidity of the bonds.” BNP arrived at a 21% discount to the bonds’ book value, prompting the bank to set aside more than €500 million, or roughly $725 million, to cover the increased likelihood of losses.

By contrast, many other banks did attempt to value the Greek bonds at the prices that they were changing hands in the market—a method that pointed to the bonds being worth at most half of their face value. Royal Bank of Scotland Group PLC, for example, calculated a 50% loss rate on its £1.45 billion ($2.38 billion) of Greek government bonds, and set aside £733 million to cover potential losses. The bank said it could recoup some of those losses later this year, depending on the final outcome of the Greek debt restructuring.

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What makes this even more embarrassing is that this news came on the same day that the head of the EFSF is attempting to provide a resolution to the finnish collateral deal based on shares in Greek banks:

The euro zone is considering providing donor members including Finland with collateral in the form of Greek banking shares to secure the next aid package for Athens, Germany’s Handelsblatt will report Wednesday citing unnamed European Union diplomats.

According to the report, European Financial Stability Facility head Klaus Regling has proposed the idea to European finance ministers, who will discuss the matter early next week.

Regling’s office didn’t have an immediate comment on the report Tuesday.

Of the EUR109 billion expected to make up the euro zone’s second rescue package for Greece, at least EUR20 billion is earmarked for Greek banks, according to Handelsblatt.

In return for getting the aid, Greek banks will be partially nationalized, the article quotes unnamed sources in Brussels as saying.

The Greek government would provide donor countries in the euro zone with the nationalized equity stake as collateral, according to the report.

A collateral deal based on equity in a bank that is backed up by a sovereign bonds of a nation that you are being asked to bailout that could well have a value far less than reported due to its exposure to those same bonds. What a deal!

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Other Greek banks have just announced their own write-offs for their exposure (I am not sure how this was calculated) and the result makes me wonder why anyone would want to hold a single share in any of them:

Piraeus Bank SA, Greece’s fourth-largest lender by assets, said Wednesday it would take a €1 billion ($1.44 billion) impairment on its holdings of Greek government bonds as part of a debt-swap program designed to cut Greece’s public debt.

The write-down pushed the bank to a second-quarter net loss of €822 million compared with a year-earlier profit of €3 million.
In July, European Union leaders agreed to a new €109 billion aid program for Greece to cover its financing needs for the next several years. Central to the Greek plan is the bond-swap deal, whereby the country’s private-sector creditors agree to accept new securities worth less than their original holdings.

For the three months to June, Piraeus Bank said net interest income rose to €319 million from a year earlier €298 million.

The bank also said it would set aside €200.7 million as provisions for non-performing loans, up from €135 million in the second quarter of last year.

The results come a day after Greece’s largest lender, National Bank of Greece SA, announced a €1.65 billion write-down on its Greek government bond portfolio.

On Monday, Greek lenders Alpha Bank SA and EFG Eurobank Ergasias SA—which have announced plans to merge—also disclosed write-downs on their holdings of Greek government bonds.

Maybe it is time that Jean-Claude Trichet, Jean-Claude Juncker and Olli Rehn re-assessed their response to Christine Lagarde’s request to “mandatory” recapitalisation of EU banks.

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