Announcing its second quarter results on Tuesday, BNP Paribas revealed how it intends to mitigate the effects of its €4bn exposure to Greek sovereign bonds. It reckons that the market for peripheral sovereign debt has been too illiquid this year to be relied upon for proper valuations. So it's decided to take a different tack.
BNPP, like most other firms with a significant exposure to Greek debt, had the bulk of the bonds held in its banking book under the available-for-sale category. But not anymore. It has now popped them all into the loans and receivables classification, meaning that it can value them according to its own internal valuation models, not to that pesky market.
BNPP was not the first of the major European banks to report its second quarter results, but it was the first to disclose a reclassification of this sort. And in doing so, it has well and truly let the accounting genie out of the bottle. If they are not already doing so, others would be expected to try something similar.
Of course, there's a quid pro quo that comes with this sort of accounting jiggery-pokery, and that is effectively conceding that you are not going to be looking to sell the assets you have moved.
That's a pain, surely? Well, ordinarily it would not be ideal, but it doesn't really mean a lot in this particular case. After all, the French banks were politely asked by their government and EU authorities if they wouldn't mind terribly not dumping their holdings on the market, thank you so much. Once you've agreed to that, there seems little sense in keeping them somewhere where the accounting hurts more.
Liquidity of peripheral sovereign debt has indeed been severely restricted. But, in a wonderful example of self-fulfilment, one effect of some of the biggest holders of Greek debt signing up to an agreement not to sell has surely been to reduce liquidity in that market.
Handy, that. And even handier that if liquidity collapses enough, accountants are now able to take advantage of one of the more helpful results of the sub-prime crisis — a relaxation of accounting regulations that allows banks to shift illiquid assets into buckets that don't need to be marked to market.
Bankers generally like to moan about illiquidity, and with good reason. No one likes being stuck with a position while the market moves against them. But at least where peripheral sovereign debt is concerned, there's now a happy solution. Forget about the market.