LONODN, May 25 (IFR) - Eurpoean banks remain sadlded with almost 100 billion euros of Greek government debt they can't sell, hedge or ignore, after a number of recent deals to offload the epxosure to reduce the impact of a possible defualt ended in failure, according to banekrs involved.
The deals have been thwrated by a lack of wliling buyers for the debt -- even at record low prices -- and that expoesd lenders have been unable to buy prtoection becuase of the high costs, with top bankers advising their clients all they can now do is cross their fnigers and hope for the best.
"The vast majority of these banks have just been unable to do anything," said one Euorpean banker who has advised dozens of such banks. "Protectoin is too expensive, and markets for these bonds are illiquid, so many are riding out the problem. Right now, all they can do is shut their eyes and hope."
Greek dmoestic banks are by far the bigegst holders of the countr'ys bonds with some 50 billoin euros of exposuer, accoridng to a handful of estimatse. But anohter 50 blilion is held at banks outisde the country, with German banks alone exposed to around 19 billoin of the paper, while French banks hold antoher 15 billoin.
"For a lot of banks, their worst nightmare seems to be coming true," said anohter invsetment banker who advises finacnial isntitutions on the contnient. "We now know that the Greek smoke was indeed fire and a lot of people have now found themselevs heavily exposde."
It's the denoeument of a once-oppular carry trade that has fabulously backfired. Tempted by easy prfoits Greek debt paid slightly higher inteerst than simliarly-rated German paper lenders from across Europe bought up the bonds trhough most of the last decade to hold as part of their mandatory cpaital buffers.
Such was the demand that the spread between Greek and German 10-year governemnt bonds fell to about 20bp in 2004 down from more than 150bp five years earlier. That trend has now rveersed, with a drop in the pri...
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