BNP Paribas hits back at critics over sovereign debt holdings
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BNP Paribas hits back at critics over sovereign debt holdings

Statement from BNP Paribas designed to calm fears has led some analysts to further question if the bank’s management understands the risk it faces

BNP Paribas today issued a vehement rebuttal to claims that its Italian sovereign debt holdings may leave it vulnerable to a Lehman-style collapse.

BNP Paribas has been the target of much speculation regarding its extensive holdings in Italian sovereign debt. Today, the bank attempted to lay the cupboard bare on the level of exposure it faces.

The bank’s report took the form of a question-and-answer session, beginning with a confession that it had been asked “a number of questions” regarding their sovereign debt ties to Italy and their liquidity. Concerns about BNP Paribas’ exposure had led to a slump in the bank’s share price in recent days.

The aftermath of the report saw BNP Paribas’ share price rise 3% in trading today.

But analysts are not convinced. One analyst speaking to Euromoney expressed surprise that the bank would respond to criticisms in such a fashion. He deemed the report “patronizing” and indicative of a “gulf of understanding” about the current financial situation existing between the bank and the market. “The report showed a degree of vulnerability that was manifestly not worth the small rally in share price,” the analyst said.

Where might this “gulf” exist? BNP Paribas stressed in the statement that its sovereign debt holdings were not considered to be risky when they were acquired – indeed that at the time of acquisition they were deemed “risk free” – and that government securities are still considered by regulators to be “one of the most liquid and non-risky assets available.”

This, of course, has not been the experience of many operating in the European sovereign debt markets in recent months.

The report also emphasized that, in the eyes of regulators, government bonds – even those of a country in as much of a crisis as Italy - serve a valuable purpose in providing a liquidity buffer and as a hedge against interest rate risk, an issue of particular concern to BNP Paribas given the non-interest bearing nature of current accounts in France.

The report sought to rebut the bank’s perceived large exposure to Italian sovereign debt, contending that its €21 billion exposure amounted to only 1.7% of its total commitments and amounted to only 1% of outstanding Italian bonds. The bank also explained that even if the level of exposure may be large, at the time the debt was acquired it was a sensible move given the bonds’ aforementioned utility in liquidity management.

The report also sought to assuage fears of an escalation in the sovereign debt crisis, while market participants are concerned that a default could trigger another Lehman-style crisis BNP Paribas contended that the current situation is not comparable. The report submits that the fall in activity in the market is not attributable to counterparty risk, but rather to banks “pre-empting the impact of the future Basel liquidity regulation” leading to a focus on instruments with a duration of one month or less.

Even if such an event were to occur, BNP Paribas insisted that it would have limited effect on its operations. The report stresses the bank has “access to substantial short-term euro funding” and that it has been “taking steps since the start of 2011 to secure its funding position.” The bank was confident that its long-term position was secure, having completed it’s €35 billion long-term funding programme in June.

BNP Paribas has been one of the best performers among European banks, with net profits of €2.1 billion in Q2 2011– a 1.1% increase on the second quarter of 2010.

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