08/30/2011 08:59 EDT | Updated 10/30/2011 05:12 EDT

Accounting body: Some European banks did not take sufficient writedowns on Greek debt

BRUSSELS - An international accounting board has sharply criticized some European banks and financial firms for not taking sufficient writedowns on the Greek bonds they hold.

The International Accounting Standards Board said some firms only wrote down the value of their Greek bonds according to a restructuring suggested by the Greek government, which would see their value drop by about 21 per cent.

However, if firms tried to sell those bonds on the open market now, they would get much less than that, IASB Chairman Hans Hoogervorst said in a letter to the European Union's market regulator, the European Securities and Markets Authority.

"This is a matter of great concern to us," Hoogervorst said in the Aug. 4 letter, which was made public Tuesday.

The IASB sets the International Financial Reporting Standards, which most European companies use when reporting their earnings. However, the board cannot force companies to actually comply.

Hoogervorst said the public criticism was an exceptional move, triggered by "visibly inconsistent application" of accounting rules.

The IASB declined to name the firms that had not taken sufficient writedowns or to comment further.

Confidence in many European banks has been shaky because of the tremendous amount of Greek debt they hold and uncertainty over how much the bonds are worth. Such worries caused bank stocks to plummet earlier this month.

Because of Greece's precarious situation, its bonds are barely traded, so there is very little information about how much they are actually worth — though everyone agrees it's far less than the face value.

Even analysts that follow banks aren't sure how much trouble the institutions are in, said Louise Cooper, a markets analyst with BGC Partners. She noted that several analysts were saying bank stocks looked cheap — that is, their share prices were likely to rise.

But Christine Lagarde, the chief of the IMF, recently suggested the opposite when she voiced concern that European banks weren't sufficiently capitalized. In other words, they don't have enough money to ride out the rest of this storm.

"So which is it?" Cooper asked in a note on Tuesday. "One thing I can say for sure is that this sector is mispriced, but whether the European banks are way too cheap or way too expensive, I do not know. No wonder bank share prices are all over the place."

Several bank stocks were down on Tuesday, though not as much as seen in previous weeks, and after a big rally on Monday.

The IASB letter said that some banks are not facing up to the fact that if they were to trade out of their Greek holdings now, they would suffer much larger losses than they have so far admitted in their balance sheets.

The European Securities and Markets Authority, said in a statement that it was investigating whether banks did indeed write down their Greek debt differently and whether they followed accepted accounting rules in doing so.

But the ESMA noted that it's up to national authorities to ensure accounting practices are followed — a nod to the fact that it and the IASB have very little power to enforce the rules.

Many banks and insurance companies across Europe wrote down the value of their holdings of Greek debt in their second quarter earnings statements, after eurozone leaders asked them to contribute to a second bailout for Greece at July 21 summit.

Since then, Greece has given firms several options of either rolling over or swapping their bonds for new ones that would result in a loss of about 21 per cent. However, under IFRS rules, different accounting standards apply to bonds that firms plan to hold to maturity — the moment the debt issuer has to repay them — and ones that are available for sale.

Those latter bonds, the IASB says, should be accounted for at their current market prices, which at the moment are far below a 21 per cent discount.

French bank BNP Paribas, for instance, wrote down its Greek sovereign debt holdings by 21 per cent — taking a loss of €560 million in its second quarter earnings report — rather than to current market values. The bank said it considered market prices not to be representative of the bonds' fair value, given that very little trading was happening.

Carine Lauru, a spokeswoman for BNP Paribas, said the bank had conducted its writedowns in accordance with its auditors and in compliance with EU rules. She declined to comment further.

CNP Assurances, a French insurance company, also said it wrote down its Greek holdings by 21 per cent, or €353 million. Spokesman Florence de Montmarin said that writedown was approved by their auditors and noted that the loss was absorbed by money set aside.

The German bank Commerzbank, on the other hand, took a 51 per cent loss on its Greek bonds classified for sale and a 21 per cent haircut on the ones it planned to hold to maturity, according to its earnings statement.


DiLorenzo contributed from Paris. David McHugh in Frankfurt, Germany, also contributed to this story.