Which Banks Have the Highest Exposure to Irish Debt?

The financial crisis in the European Union is not just about sovereign risk.  Sovereign bond yields, CDS spreads, and even the Euribor rate all indicate grave doubts about the liquidity and possibly even solvency of some large European financial institutions.  This is the stuff systemic risk is made of, and it will be hovering over the EU like the sword of Damocles for years to come because current fiscal authority arrangements are no longer providing credible backing to the monetary union.

In July, ninety one banks were asked to disclose their exposure to central and local government debt in 30 European countries as part of the stress test carried out by the Committee of European Banking Supervisors (CEBS), the banking regulator of the European Union.

Here is a list of the banks with the largest exposure to Irish debt, according to data disclosed during this stress test:

Top Banks, by Net Exposure (in €)

Bank Exposure    
RBS 4.8B    
Crédit Agricole 929MM    
HSBC 816MM    
Danske Bank 655MM    
BNP Paribas 571MM    
Groupe BPCE 491MM    
Société Générale 453MM    
Banco BPI 408MM    
 LBBW 408MM     
Bank of Cyprus   356MM    
 DZ Bank  310MM    
 Postbank  300MM    
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Euro Debt and Deficit Levels

Eurostat, the statistical office of the European Union, released this morning the latest government deficit and debt data for the EU Member States.   In 2009, the deficit to GDP ratio in the entire euro area (EU16), and also for the wider group of EU member countries EU27  increased from around 2% to 6% compared to the previous year. The debt to GDP ratio increased to 79% in the euro area, and to 74% in the EU27.  

Not surprisingly, Greece and Ireland lead the tables of deficits, and Greece is also #1 in the debt to GDP category. 

Here is a summary table drawn to highlight the countries with highest deficit to GDP and/or debt to GDP ratios:

European Deficit and Debt Levels, 2009

Country Deficit as % of GDP Debt as % of GDP  
GREECE -15.4 126.8  
IRELAND -14.4 65.5  
SPAIN -11.1 39.6  
PORTUGAL -9.3 76.1  
FRANCE -7.5 78.1  
ITALY    +3.4  116  
BELGIUM +0.2 96.2  
HUNGARY +9.3 78.4  
GERMANY +1.6 73.4  
UK -11.4 68.2  
AUSTRIA +1.5 67.5  
NETHERLANDS -0.5 60.8  






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Is Ireland getting ready for an EU rescue?

According to an article in The Telegraph the Irish government is said have been in “frantic talks” over the weekend with EU and European Central Bank officials over a rescue package.

A full bail-out deal, rumoured to be to worth between £51billion and £77billion could be agreed at a meeting of EU finance ministers. Most of the help will come from the £374billion European Financial Stability Fund, which is funded by eurozone countries.

A bail out tapping the EFSF would come with very onerous conditions, not unlike those Greece had to agree in May.  For Ireland, these will include demands to raise government revenue by increasing the 12.5% corporate tax rate which has been responsible for attracting huge foreign direct investment into the country. It is something of a sacred cow as it led to phenomenal GDP growth rates of as much as 11% before the financial crisis and the blanket bailout of all Irish banks by the government.  Naturally, the Irish are reluctant to sacrifice it. They hope that, with a little bit of luck, the capital markets will calm down, and allow the Irish government the time to find a solution to the country’s funding gap running at about 32% of its GDP this year.  The government intends to present a 4 year budget proposal and austerity plan in the first week of December. But at the moment that looks like it is far too long a wait, if indeed it would ever be enough to reassure the bond market.

The key period, said officials, would be the reaction of the international market today to Irish and other eurozone bonds, especially Portuguese and Spanish government debt. Any sign of panic will lead to fears of so-called market contagion spreading from Ireland to Portugal, Spain and the wider eurozone. This is likely to lead to Ireland coming under pressure to sign up to the bail-out.

As noted in a previous blog here, the major concern now is that panic will spread to other eurozone countries which are heavily indebted and spill over onto the banking system.

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Are US-China relations getting a bum rap? Or Frenemies – Sunday comix from econgirl

Link to a YouTube video on global imbalances proving economics is not always dismal!

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IMF gets ready to contain contagion

In a technical note today, the IMF spells out how several countries hit by “the same shock” can get approval to tap its Flexible Credit Line (FCL) set up during the ’07-’08 crisis.  By providing for multiple countries to ask for it, the IMF hopes to “minimize first-mover problems”.

According to the IMF, “the Flexible Credit Line (FCL) was designed to meet the increased demand for crisis-prevention and crisis-mitigation lending from countries with robust policy frameworks and very strong track records in economic performance.” Only 3 countries (Poland, Mexico and Colombia) have accessed the FCL, but  so far none have drawn on FCL resources. 

Who is next?

Interestingly, one of the qualification criteria is that the country should have no “no bank solvency problems that pose systemic threats to banking system stability”.  Is that a problem for Ireland? The answer is probably NO, as this is intended to  help countries obtain short-term funding to weather the crisis and reassure financial markets and investors.

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What do Germany and France mean to Ireland

Dark humor has always been  characteristic of countries facing grim realities. People living in the former Eastern Bloc have a rich treasury of it, for instance.  And now the Irish are coming up with  their own jokes, as the sovereign risk crisis becomes an inexorable grim reality of their daily existence.  Here’s an example: “Ireland is even worse than Greece…and not just because of the weather”. 

This morning Angela Merkel  gave the Irish and other peripheral Eurozone countries struggling under unsupportable debt burdens more reasons to worry.  She issued statements in Seoul at the G20 meetings indicating that in any new bail out Germany will insist that bondholders share the pain with taxpayers in any future sovereign default resolution mechanism.  The Financial Times  quotes Angela Merkel:  “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”  In other words, a Greek-style bail-out is not likely to be in Ireland’s or any other peripheral Eurozone country’s future.  Not surprisingly, the Portuguese want an immediate clarification of how the new resolution mechanism being worked on will operate exactly.  Christine Lagarde, the French Finance Minister supports the principle: “All stakeholders must participate in the gains and losses of any particular situation,” she said.  This kind of talk is scaring creditors used to huge government bailouts of  US and European financial institutions. 

Furthermore, the ECB is demurring on continuing to step in and replace waning private appetite for peripheral sovereign debt. An article in Bloomberg calls the ECB the buyer of “only resort” for Irish, Greek, and Portuguese bonds. But in order to contain contagion the ECB needs to start buying up Spanish bonds as well.  This is the only bridge until the ESFS can be tapped (the ESFS is still an unfunded facility at the moment).

A breaking news article in The Irish Times   claims that “informal contacts are under way between Brussels, Berlin and other capitals to assess their readiness to activate the €750 billion rescue fund in the event of an application from Dublin.”

What next, is a fair question for the markets to ask, as we are beginning to witness another snowball effect of systemic risk in Europe.

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When will Ireland’s sovereign debt crisis come to a head?

For many analysts Ireland’s ten-year bond rate  is an implicit measure of the probability of an event of default for Irish sovereign debt.  But 10 years is not the time frame anyone is seriously considering for such an event.

Since the shorter-term bond yields have also been scaling dizzying heights, the time horizon for a default or restructuring of debt is more likely within the next 4 years.  For example, the 2 year bond yields  have skyrocketed since the end of the summer when they were slighted over 2%; they ended the day today at 6.69%.  The 4 year bond yields tell a similar tale.  Clearly market participants assume that Ireland will be tapping the EFSF between 2012 and 2014.  The current negative sentiment towards Ireland in the bond market is unmistakable.

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