????The selling spree currently swirling through the European debt markets, which regulators worry may spread to U.S. banks, was caused in large part by a series of policy gaffes by European regulators and banking authorities.
????On Oct. 26, the European Union's leadership agreed to force banks to raise their capital to asset ratios from 5% to 9%. The assumption was that Europe's 70 largest banks would get new money from investors or forego dividends, thereby restoring confidence to the financial system. But the decision left open another possibility: dumping assets, which is exactly what major banks appear to be doing.
????For instance, BNP Paribas, which is France's largest bank by assets, announced on Nov. 3 that it had sold off 24 billion euros ($32 billion) worth of sovereign bonds. "We very much reduced our exposure to sovereign debt," BNP Paribas CEO Baudoin Prot said in a Bloomberg television interview, acknowledging that the demand for new capital was the cause for the speeding up of the process. Among the sold items: $11 billion of Italian government bonds. The bank said it expected to lose more than $1.3 billion on the asset sales.
????Societe Generale and Germany's Commerzbank have also announced sell-offs of their sovereign debt, and it is believed many other institutions are quietly dumping their Italian bonds.
????"This was a big mistake," says Benn Steil, director of international economics at the Council on Foreign Relations in New York. "The banks looked at what it would cost to raise capital and they said that's prohibitive. They have been quite clear about their response: they are going to shed assets."
????Charles H. Dallara, managing director of the Institute of International Finance, which is representing 450 banks in their negotiations with Greece, warned European leaders that the recapitalization plan would cause serious problems. "The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds," Dallara wrote in a letter to G20 leaders meeting in France.
