DEBT BURDEN FALLS HEAVILY ON GERMANY AND FRANCE / THE NEW YORK TIMES ( HIGHLY RECOMMENDED READING )

June 13, 2010

Debt Burden Falls Heavily on Germany and France

By JACK EWING

FRANKFURT — French and German banks have lent nearly $1 trillion to the most troubled European countries and are more exposed to the debt crisis than the banks of any other countries, according to a new report that is likely to add pressure on institutions to detail their holdings.

French banks had lent $493 billion to Spain, Greece, Portugal and Ireland by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks.

The report sheds light on where the risks from Spain and other troubled euro-zone countries are concentrated, but left open the question of which individual banks would be most endangered by declines in the prices of sovereign bonds or a surge in bad loans made to companies and individuals. The B.I.S. did not identify individual institutions, in line with its confidentiality rules.

Voluntary disclosure by banks has been uneven. Hypo Real Estate Holding, a real estate and public-sector lender based near Munich, has put its exposure to government debt from the four countries plus Italy at more than €80 billion, or $97 billion. Deutsche Bank, in Frankfurt, says it holds €500 million in Greek government bonds and no Spanish or Portuguese sovereign debt.

But there has been little disclosure from the hundreds of smaller mortgage lenders, state-owned banks and savings banks that dominate banking in countries like Germany and Spain.

“More information and disclosure on bank and financial institutions’ holdings of periphery paper would be beneficial,” Jacques Cailloux, an economist at Royal Bank of Scotland, said Sunday. Mr. Cailloux had not seen the report — which was released to news organizations on the condition that they not publish the findings until late Sunday — but he was one of the authors of a Royal Bank of Scotland study in May that anticipated many of the B.I.S. findings.

All told, Spain, Ireland, Portugal and Greece owe nearly $1.6 trillion to banks in the 16-country euro zone, either in the form of government debt or credit to companies and individuals in the four countries, the report said. Credit from French and German banks accounted for 61 percent of that total.

Uncertainty about which banks may be at risk from Greece and the other countries has fed mistrust among financial institutions, causing interbank lending to wither and leading European Union leaders to take extraordinary steps to prevent a financial collapse.

The European Central Bank has been pressuring E.U. regulators to release data on which banks may be most at risk, to separate the healthy banks from those that may be in trouble.

“We are encouraging them to do whatever is necessary to improve the sentiment of the market because that is the real issue today,” the E.C.B. president, Jean-Claude Trichet, said at a news conference last week.

Mr. Cailloux said that releasing the results of so-called stress tests, which examine banks’ ability to withstand market shocks, would be useful if the tests were based on realistic possibilities and there were measures in place to bolster the banks that prove vulnerable.

The lack of information about which banks could suffer most from Europe’s debt crisis led to the near-seizure of money markets in early May. That, along with plunging prices for sovereign bonds from the weakest countries, prompted the European Union and the International Monetary Fund to pledge nearly $1 trillion in debt guarantees for euro-zone governments.

The European Central Bank also took the unprecedented step of buying European government bonds in the open markets, where trading had nearly come to a halt.

“There is mounting evidence that the blind don’t want to lend to the blind,” Ed Yardeni, president of Yardeni Research, wrote in a research note last week.

The B.I.S. figures confirm estimates of the level of risk by analysts at Royal Bank of Scotland and others, which had been extrapolated from B.I.S. data and other sources. But the B.I.S. report provides more detail on country-by-country exposure, and the organization’s imprimatur means it will be difficult for critics to dismiss the information as exaggerated.

Most of the claims held by the French and German banks were from companies, individuals or other banks, and Spain was the biggest debtor country. But much of the holdings were government debt — $106 billion for French banks and $68 billion for German banks. The figures, which the B.I.S. presented in dollars, may offer a clue why the French government, in particular, has been keen to provide aid to Greece and the other troubled countries.

Private-sector debt from Spain, Greece, Portugal and Ireland has also become a concern, because government austerity programs and economic downturns in those countries may also take a toll on the ability of companies and individuals to repay loans, and lead to a surge in defaults.

The risk from the so-called peripheral countries is by no means limited to France and Germany. British banks have lent $230 billion to Ireland, while Spain — besides being one of the countries with a debt problem — has lent $110 billion to residents of Portugal.

The B.I.S. put total exposure by U.S. institutions to Spain, Greece, Portugal and Ireland at less than $200 billion.