EU banks hold 194.1bn Euros of potentially toxic bonds

The 90 most important banks in the European Union jointly hold 194.1 billion Euros of bonds issued by the governments of Greece, Ireland and Portugal, the aggregate report  of the European Banking Authority (EBA) reveals (see pages 28-30). This means financial institutions in the EU soaked up about 30 percent of all public debt issued by the countries at the core of the crisis.

124 bn Euros of this debt – 64 percent – is owned by domestic banks in the issuing country. German financial institutions are the biggest creditor of the Greek government next to domestic institutes.

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(complete table on Google Docs)

According to the report released in London on Friday, the joint exposure to Greek government bonds of German banks is about 8.8 billion Euros (9 percent of the 98.2 bn Euros of Greek bonds that are in the EU banking system). French banks come second. They hold about 7.9 billion Euros or 8 percent of all Greek bonds.

Besides 98.2 billion Euros or 30% of all Greek sovereign debt (328,6 bn Euros, [see here page 13], banks in the EU hold 52.7 billion Euros of Irish debt (that’s 35,6 % of the total Irish public debt which amounts to 148 bn Euro [see here, page 12]). They also hold 43.2 billion Euros of Portuguese government bonds or 27% of Portugals total public debt of 160 bn Euros [see here, page 26]) .

Hence, the total exposure of the banking system towards the three crisis countries adds up to the breathtaking sum of 194.1 billion Euros. That’s about one third of the entire public debt of those three countries, which amounts to 636,6 bn Euros.

A Greek default would be devastating for the already weak banking sector of the country. Financial institutions in Greece hold 65.8 billion Euros of Greek bonds (67 % of the entire exposure). With regard to Ireland (61 percent) and Portugal (63 percent) the picture is similar.

“A further deterioration in the sovereign crisis might raise significant challenges, both on the valuation of banks holdings of sovereign debt and through sharp changes in investors’ risk appetite”, the EBA asserts.

However, the reports downplays the direct risks this exposure yields for the banking system. The report stresses that:

“the direct first-order impact [of a further deterioration of sovereign debt] … would primarily be on the home-banks of countries experiencing the most severe widening of credit spreads”.

Amazingly, the EBA, apparently does not consider this a particularly risky thing:

“[T]he capital shortfall should be easily covered with credible back stop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece.”

However, the report also stresses that potential second-round effects are not taken into consideration.

“Such effects, including more general changes in investor perception, challenges in funding across a broader set of EU banks and the impact on non-bank counterparties may be more significant.”

For German banks, an outright banking crisis in Greece would have significant indirect effects. According to the report, they are the counterparty for 10 percent or 1.7 billion Euros of all Greek interbank holdings by EU banks. Financial institutions in France are counterparties for 5 percent of all Greek interbank holdings.

If Greece goes, the next country to go under probably is Cyprus. Banks in Cyprus hold six percent of all Greek government bonds and are counterpartries for 12 percent of all Greek interbank holdings.

Update: Tom Gleeson made a good point on Twitter. He wrote with regard to this post:

“So Irish banks hold 61% of our public debt  and state effectively owns the banks;so state owns majority of its own debt?”

That’s really an interesting observation. However, given that Irish government debt equal 148.1 bn Euros and Irish banks are exposed to 32.2 bn Euros of Irish bonds, the Irish government owns “just” 22 percent of its own debt. (see my table on Google Docs)

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