After Greece’s leader announced he would put a 130 billion euro ($181 billion) bailout plan to a referendum, French banks along with other lenders sunk. The European bank index was down 6.1 percent, which negated all gains made on Thursday. Prime Minister George Papandreou said he needed wider political backing for the bailout, but chances are voters will reject it.
These top European banks are getting crushed on the news: UBS (NYSE:UBS), Deutsche Bank (NYSE:DB), Barclays (NYSE:BCS), Royal Bank of Scotland (NYSE:RBS), Lloyd’s (NYSE:LYG), and Credit Suisse (NYSE:CS).
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Andrew Lim, banking analyst at Espirito Santo in London says if Greek voters don’t agree with this bailout plan it could cause a “hard default” where banks would suffer losses of about 75 percent on their Greek sovereign bonds, prompt payouts on credit default swap insurance contracts, and raise the threat of a systemic risk. He says “If we get a hard default in Greece, it will exacerbate the situation with Italy (NYSE:EWI) and Spain (NYSE:EWP). It just increases the problem of Italy going down the same route, and that’s the real risk.”
The vote should take place in a couple of weeks. There were hopes last week that a deal could draw a line under banks’ Greek losses and the euro bonds could be sold to China (NYSE:FXI) and other investors.
A hedge fund manager specialized in euro zone debt said, “The Greece referendum has completely undermined the euro zone’s ability to sell EFSF bonds. The Chinese can’t invest in any euro zone fund while the question in Athens remains unanswered. (The) same goes for progress on a haircut and banks.”
Affected by the announcement of the plan were France’s Societe Generale, down 13 percent and BNP Paribas and Credit Agricole down over 10 percent. Italy’s Unicredit and Intesa Sanpaolo dropped 11 percent and Germany’s Deutsche Bank (NYSE:DB) and Commerzbank was down 8 percent. Insurers ING (NYSE:ING) and AXA both lost 11 percent.
A big concern is that banks in France (NYSE:EWQ) and Germany (NYSE:EWG), most exposed to Greece, will take hits on loans to companies and homeowners. Credit Agricole, for instance, had 27 billion euros of loans to Greece at the end of last year through its Greek subsidiary.
An even bigger concern is that the crisis will spread to Italy (NYSE:EWI) and its huge bond market. Unicredit held 47 billion euros of domestic sovereign bonds at the end of last year. Yields on Italian 10-year bonds rose to 6.2 percent on Tuesday.
Holger Schmieding, economist at Berenberg Bank said “The Greek move makes it all the more important that Italian and Eurozone policymakers, including those from the ECB, build a reliable firewall around Greece to prevent more serious contagion to Italy.”