Stock Market Predictions

Europe's banks, insurers jump on Greece rescue deal

Stock Market Predictions

Although the deal will force many banks to take a big hit -- non-Greek banks face a 5.4 billion euros ($7.7 billion) loss -- the Greek deal was seen as reducing the threat the euro zone crisis will spread to Spain and Italy. But risks remain.

"It is good that everybody has been able to make a compromise, but it still needs to be detailed and implemented," said Francois Savary, chief investment officer at Geneva-based fund managers Reyl.

Other investors and analysts also gave it a cautious welcome, saying the threat of further contagion remains.

"There is still the need for a strong policy response, but the market's reaction this morning shows it is willing to give them (EU leaders) credibility," said Paola Biraschi, an analyst at RBS in London. "There is more to come ... but it has restored credibility."

By 0830 GMT the STOXX Europe 600 banking index .SX7P was up 1 percent, pulling back from an early 2.6 percent rally. The index jumped 4 percent on Thursday as a Greek deal neared. The STOXX Europe 600 insurance index .SXIP was up 1.1 percent in early trade.

Four options are being offered to creditors, including bond exchange and rollover offers as well as a bond buyback scheme as part of a 37 billion euro private sector contribution to Greece's rescue plan.

Financial firms are likely to write down the value of Greek bonds in the second quarter, possibly by 21 percent, but more losses could follow. The change in the terms on Greek bonds means ratings agencies are likely to downgrade Greece to selective default soon.

"We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65 percent," said Gary Jenkins, head of fixed income research at Evolution.

Top early gainers included firms that have been hit hard by the threat the Greek crisis could spread.

Belgian-French Dexia (DEXI.BR) jumped 4 percent and France's BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA), Italy's Unicredit (CRDI.MI), Germany's Commerzbank (CBKG.DE) and Britain's Barclays (BARC.L) all gained over 2 percent. Insurers AXA (AXAF.PA) and Ageas (AGES.BR) were each up about 2 percent.

The Institute of International Finance (IIF), which has led the negotiations for private investors, reckons 90 percent of creditors will sign up. Deutsche Bank (DBKGn.DE), HSBC (HSBA.L), BNP Paribas, Allianz and AXA are among the firms to already sign up.

There is about 150 billion euros of outstanding Greek sovereign debt, so a 90 percent take-up would account for 135 billion euros, including about 54 billion euros in the period up to mid-2014.

Europe's banks held 98 billion euros of Greek debt at the end of last year, with two-thirds of that in domestic hands. They will be recapitalized under the rescue plan, with about 15 billion euros likely to be pumped in, on top of 10 billion already earmarked for them.

About four-fifths of debt is typically held in banking books that may now face a haircut, indicating non-Greek banks face a loss of 5.4 billion euros.

BNP Paribas has the biggest holding outside Greece, with 4.5 billion euros of bonds in its banking book, according to data released last week as part of an industry health check. A 21 percent loss on that would be 945 million euros.

Dexia held 3.5 billion euros and Cyprus's Marfin CPBC.CY held 3.4 billion, indicating a hit to each of over 700 million euros. Commerzbank held 3 billion euros and Societe Generale (SOGN.PA) held 2.4 billion, so they face haircuts of 630 million and 500 million euros respectively. ($1 = 0.695 Euros)

(Reporting by Steve Slater, Myles Neligan and Sudip Kar-Gupta in London and Michel Rose in Milan; Editing by Mike Peacock)