PARIS/LONDON (Reuters) - A credit rating downgrade for Portugal has added to fears Europe's banks face heavy losses on their euro zone lending if a private sector plan to help Greece comes unstuck, piling pressure on creditors meeting on Wednesday.
Banks are attempting to fine-tune a private sector creditors' deal for Greece that can get past credit rating agencies without it being termed a default.
Industry lobby group The Institute of International Finance (IIF) chaired the meeting of banks and other private-sector creditors in Paris on Wednesday, held at the headquarters of BNP Paribas, France's biggest bank and one of the biggest holders of Greek debt.
BNP's chairman said the banks needed to find a solution to the Greek debt crisis that would not cause ratings agencies to declare a default.
The initial meeting ended around lunchtime but more meetings will be held to "move ahead" with the private sector's aim of participating in Greece's rescue, a spokesman for the IIF said.
"We need to find a solution that avoids a default since that's the decision of the authorities," Michel Pebereau told BFM Radio in an interview.
Banking industry sources had said there would not be a decisive outcome from the meeting, and Pebereau said there was still a number of options on the table.
"A deal can't happen without the agreement of the troika which is dealing with this issue on behalf of the Greeks (the EU, IMF and ECB), the Greek government and then all the bondholders who are affected by this issue," Pebereau said.
He also said it was important to distinguish between the Greek debt issue and similar crises that are roiling Portugal as well as Ireland.
Banks in France, Spain and Germany are the biggest holders of Portuguese government bonds, with lenders in each country holding about $8 billion of bonds at the end of last year.
That became a bigger concern after ratings agency Moody's late on Tuesday cut Portugal's credit rating to junk and warned the country might need a second round of rescue funds before it could return to capital markets.
The Stoxx 600 Europe banking sector share index was down 2.4 percent by 1315 GMT, with banks in peripheral euro zone countries performing worst.
Portugal's Millennium bcp tumbled 6.8 percent, and Banco BPI dropped 5 percent.
Italy's UniCredit and Intesa Sanpaolo and France's Credit Agricole each fell over 5 percent, and Spain's Santander and BBVA, France's Societe Generale and Britain's Barclays all lost over 3 percent.
French banks have proposed voluntarily renewing Greek bonds when they fall due. Bondholders would reinvest at least 70 percent of the proceeds from bonds maturing between now and the end of 2014 in new 30-year Greek debt.
The Financial Times said a new proposal, sweetened to be more attractive to Greece, would be presented and offer to lower the interest rate and raise the proportion of debt targeted for rollover in the French plan.
The IIF, which represents over 400 financial firms, last week said it supported proposals to aid Greece, and member firms were considering a small number of options.
The cut to Portugal's rating adds to the prospect of sluggish economic growth in the next few years means Portugal will struggle to get its debt under control and require creditors to take a hit on their holdings.
Economists at Citi last week said the debt burdens of Greece and probably Ireland and Portugal will look unsustainable by 2014, and debt restructurings with haircuts to the debt principle will be necessary.
Overseas banks have just over $200 billion of exposure to Portugal, including $34.6 billion of government debt, according to the Bank for International Settlements, which provides the only cross-border bank lending data.
Spanish banks held $8.5 billion of Portuguese sovereign bonds at the end of December, French banks had $8.2 billion and German banks had $7.8 billion, the data showed.
(Reporting by Christian Plumb and Jean-Michel Belot in Paris, Steve Slater in London, Sonya Dowsett and Jesus Aguado in Madrid; Editing by Will Waterman, Greg Mahlich)
