Banks and the debt crisis

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Banks pull cash from Europe

Eric Johnston January 27, 2012

AUSTRALIAN banks aggressively cut their exposure to Europe’s troubled economies as the region’s debt crisis intensified late last year, pulling billions of dollars in funds from Belgium, France and Spain.

At the same time, Europe’s banks cut more than $US8 billion worth of loans from the Australian economy, as they began to feel a funding squeeze in their home market.

Still, figures to be released this morning from the Swiss-based Bank of International Settlement show Australian banks increased their exposure to Italy by more than $US700 million in the September quarter even as fears spread that Europe’s third-largest economy would not be able to meet its massive debt obligations.

There were also signs that funds were being shifted to Switzerland, which is not a member of the euro zone.

The most dramatic change has been with private and public debt in Spain, where Australian-bank exposure was cut to $US212 million at the end of September from a little over $US1 billion in the June quarter.

Australian banks cut their exposure to Portugal entirely during the second half of last year. And since the end of 2009, they have had no direct exposure to Greece.

Elsewhere, exposure to France fell slightly to $US11.6 billion at the end of September from $US11.7 billion three months earlier. Lending to Belgium, home to troubled bank Dexia, was cut by more than $US330 million.

The figures also provide an indication of which banking systems are likely to take the biggest hit as talks continue to persuade holders of Greek bonds to take hefty losses as part of a debt restructuring. They are being pressed to accept losses of 60 to 70 per cent of face value.

France’s banks have the biggest exposure to Greece, with loans of more than $US43 billion. German banks also have significant exposure, nearly $US37 billion. Both countries have cut their exposure sharply over the past year.

The BIS figures also show how the debt crisis is being felt around the world. From June to the end of September, French banks pulled more than $US4.5 billion worth of loans from the Australian economy. Italian, Irish and Spanish banks each cut exposure by hundreds of millions of dollars as they repatriated capital.

German banks appeared to make up some of the shortfall, increasing their exposure to Australia by nearly $2 billion.

While the BIS figures provide a snapshot of banking-sector risk, they do not give bank-by-bank exposure. Nor do the banking statistics include a currency breakdown or information on which claims are marked to market and which are held to maturity.

Separate figures from the bank regulator, the Australian Prudential Regulation Authority, showed France’s BNP Paribas shaved $855 million from its direct lending book here over the past year. Societe Generale trimmed more than $260 million in loans.

The APRA figures does not include syndicated loans.

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