French Banks to Continue Retreat After Greek Vote

French banks, the top foreign lenders to Greece, are expected to continue their quiet retreat from the debt-wracked country after Greek voters gave a slim majority to parties supporting the international bailout that keeps it afloat.

June 18, 2012

PARIS, June 18 - French banks, the top foreign lenders to Greece, are expected to continue their quiet retreat from the debt-wracked country after Greek voters gave a slim majority to parties supporting the international bailout that keeps it afloat.

The conservative New Democracy party beat the field in Sunday's election, pushing into second place the anti-bailout leftist SYRIZA party, and calming the nerves of those who believed a SYRIZA victory would have led to Greece's exit from the euro zone and financial chaos across the continent.

But with the euro zone debt problems unresolved and Greece's political and financial stability far from assured, industry insiders and analysts say French banks will probably keep shifting assets out of the country, cutting funding ties to local units and writing down the value of Greek holdings to draw a line under years of losses.

French lenders including Credit Agricole and Societe Generale held an estimated cross-border Greek exposure of $44 billion at end-December, according to Bank for International Settlements data, putting them most at risk of a sudden, messy Greek exit from the currency union.

Greece is still in the fifth year of recession and carrying debt equivalent to about 160 percent of GDP, and if it can cobble together a ruling coalition, faces years of austerity before a return to growth, but at least the doomsday scenario has been averted for now.

"This gives banks a bit of headroom, a bit of space to try to find a lasting solution to the Greek issue," said a French banking source, adding that there was nothing in the election result that would change the strategy of cutting back on Greek exposure. "There is a structural problem in the Greek market that has to be resolved. The alternative would be to accept regular losses in the hundreds of millions of euros."

The French Banking Federation declined to comment.

Shares of BNP Paribas, which has an estimated 2.9 billion euros ($3.66 billion) directly at risk in Greece, were down 3.5 percent at 1310 GMT on Monday. Shares in Credit Agricole and SocGen, which both own local banks in Greece and have 5.2 billion euros and 400 million at risk, were down 3.6 percent.

Even as fears of a Greek exit from the euro eased, borrowing costs rose for both Italy and Spain, pointing to the broader market view that short-term improvements to the climate in Europe do not address the root economic problems. Some feared the election result could even have pushed back a solution.

"The big countries like Italy and Spain are still under pressure," said a London-based bank analyst. "If the anti-austerity parties had won, it would at least have given a big kick up the backside for European policymakers to act faster."

ARM TWISTING

French banks have been cutting back their exposure since 2011 via sales of sovereign debt and writedowns of their holdings in Greece.

Banks like Credit Agricole and SocGen are seen ploughing ahead with this strategy at Greek units Emporiki and Geniki, which have put the brakes on new lending and are set to shift more of the burden of funding onto the Greek central bank via emergency liquidity assistance.

The possibility of future injections of state capital into these subsidiaries, or further writedowns, would also work to cut their parent lenders' exposure, though the overall aim is to avoid a disorderly and costly exit.

"Credit Agricole can't just slam the door straight away," said one analyst. "It doesn't really send out a message of confidence. I'd imagine also there's a bit of political arm twisting for them to stay. They're a bit trapped."

The bank is, however, shifting some Emporiki assets into its own corporate and investment bank. On Thursday, for example, Emporiki said it would transfer shares in its Albanian, Bulgarian and Romanian units to the parent.

Credit Agricole faces a complex situation in Greece but it should be able to weather the storm, according to the French bank's former chief executive and architect of the Emporiki acquisition, Georges Pauget.

"Emporiki is not going to destabilise Credit Agricole," he told a breakfast with journalists. "But it's not going to be simple." ($1 = 0.7921 euros)