French bank suspends funds exposed to US mortgages

9th August 2007, Comments 0 comments

PARIS, Aug 9, 2007 (AFP) - French banking giant BNP Paribas on Thursday suspended three of its funds exposed to US high-risk property loans, sparking further turmoil in world stock markets.

PARIS, Aug 9, 2007 (AFP) - French banking giant BNP Paribas on Thursday suspended three of its funds exposed to US high-risk property loans, sparking further turmoil in world stock markets.

BNP Paribas Investment Partners, a unit of the French bank, said the funds -- Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia -- will accept no redemptions or subscriptions until further notice, the bank said.

The announcement sent shares tumbling in Asian markets that were still open when the news broke, as well as in London, Paris and Frankfurt, dealers said.

A Paris-based dealer said the news had shaken the market, reversing opinion on financials which rallied strongly Wednesday thanks to reassuring comments on exposure to the US subprime market, where mortgages are provided to people with poor credit histories.

"Basically, BNP is now saying it's got major problems with the credit market," he said.

There are growing jitters about the potential fallout for the world economy from problems in the US subprime lending sector.

BNP's announcement adds to these fears and follows a similar decision last Friday by the German mutual fund Union Investment which froze one of its funds that has exposure to the US subprime market.

BNP said in a statement it was suspending the calculation of net asset value in the three funds invested in asset-backed securities, due to a "complete evaporation of liquidity in certain segments of the US securitisation market."

Asset-backed securities are financial instruments collateralized by cash flows from a pool of underlying assets such as consumer loans and mortgages.

But recent anxieties over defaults on US subprime mortgages have substantially reduced the appetite for this type of security in the financial markets.

According to BNP Paribas Investment Partners, the resulting "evaporation of liquidity" means it can no longer calculate the fair value of the underlying ABS in the three funds in question, making it impossible to calculate their net asset value reliably.

BNP said it will provide further information on the situation in a month's time, and will resume calculation of the net asset value "as soon as liquidity returns to the market." 

Chief executive Baudouin Prot had already pointed out the sub-prime risk on these three funds at the second quarter earnings publication, valuing the exposure at 700 million euros, or 35 percent of the assets management by the funds.

According to a local trader, this exposure has since plummeted in value, taking total assets under management in the three vehicles from 2.075 billion euros on July 27 to 1.593 billion on August 7.

On Wednesday, Bank of England governor Mervyn King said the credit problems being experienced in the United States did not amount to an international crisis.

On Thursday the European Central Bank said it was keeping a close eye on developments in financial markets.

The market will be eager to see how Wall Street reacts to the BNP news when it reopens later Wednesday.


AFP

Subject: French news

0 Comments To This Article