Ireland’s Exposure to Greek Debt
This post was written by Karl Whelan
On today’s RTE radio News at One, Sean Whelan reported that Irish banks have exposure of about €7 billion to Greek debt, that restructuring of Greek sovereign debt could lead to a fifty percent write-down of Greek debt and that because the Irish government are supporting the banks, the contribution of €450 million by the Irish government to the Greek bailout needed to be placed against the possibility of a potential loss of €3.5 billion for the banks.
Much of this is correct but it is perhaps worth clarifying what we know about Irish bank holdings of Greek debt. First, I’m guessing that Sean Whelan is quoting from figures released from the BIS which show that Irish banks hold $8.6 billion in Greek debt. At an exchange rate of €1 = $1.31, this translates into €6.6 billion, so Sean Whelan’s figure is about right.
However, a few caveats about this are required. First, it appears that these figures relate to all Greek debt not just government debt.
Second, I believe the definition of Irish banks here include Irish outlets of non-Irish banks (such as various IFSC institutions) which are not receiving assistance from the Irish government.
Third, the figures available for the major Irish bank holdings of government bonds show that it is essentially impossible that these banks are holding such large quantities of Greek government debt. Greece’s rating was downgraded to BBB+ on December 16, this rules out AIB holding much Greek debt. The banks report their holdings of government bonds by ratings and they hold almost no government bonds with low rating (e.g. AIB only €109 million of these holdings were below A rating, Anglo have only €132 million).
So, to conclude, financial institutions in Ireland hold about €7 billion in Greek debt but we don’t know how much of this is Greek sovereign debt. We do know that the banks that are receiving assistance from the Irish government do not hold much Greek sovereign debt. For these reasons, the direct cost to the banks receiving assistance of a Greek restructuring would be a lot less than the €450 million figure cited for our direct contribution.
Keeping in mind that the caveats above are not accounted for, this post from the Peterson Institute is still worth reading.
Update: The Minister for Finance has now confirmed that Irish bank exposure to Greek sovereign debt is negligible relative to the size of their balance sheets–less than €40 million apparently.
Tags: Greece
April 28th, 2010 at 10:54 pm
Socialism is over!
It was never paid for.
Don’t expect America to bail anyone out either. They haven’t got 2 nickles to rub together!
http://usdebtclock.org/
Greece is only the beginning boyos!
April 28th, 2010 at 11:48 pm
@ KW,
However, a few caveats about this are required. First, it appears that these figures relate to all Greek debt not just government debt.
I think it is crucial to distinguish between fiscal borrowing, corporate borrowing and various kinds of personal borrowing. Greece isn’t a country with a huge amount of industry and exports, which leads me to think fiscal borrowing is larger in proportional terms than in many other countries. What I say, is that the closer you get to individual borrowing and the further you get from overall sovereign debt, the larger the annual interest payments are likely to become in the short term. In fact, in Ireland I reckon that all personal debt combined will exceed in its interest payments that of all fiscal borrowing. That is shocking to think about. However, as we all know in the medium to long term, the danger really is the fiscal borrowing principle amount is growing, at the same time as total interest payments are also rising. That is where Colm McCarthy’s kinds of insights are crucial.
On another vein, by the by, my sense is that Greece has less of a problem of personal debt than Ireland has. Which leads me to believe, Ireland is obtaining a better ’stimulus’ already from Europe, through the monetary policy. What will really get interesting for Ireland, is when a new category of debt, NAMA bond suddenly appear out there. Maybe the market will like that new flavour, or maybe it won’t like new Coca Cola, and they will go back to the original formula. Time will only tell. BOH.
April 29th, 2010 at 6:50 am
@Pat - two thumbs up
“There wouldn’t be a crisis among nations if banks’ toxic gambling debts hadn’t been assumed by the world’s central banks.”
…
BIS slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.
http://www.zerohedge.com/article/no-wonder-eurozone-imploding
What are governments without justice? - bands of thugs and robbers.
April 29th, 2010 at 8:36 am
Are we all forgetting our share of the bailout planned by the IMF ???
Anywhere between €1bn and €2bn is required.
April 29th, 2010 at 9:01 am
I was speaking with a german the other day and she had worked with a lot of politicans in Germany. She had never even thought of the cheap credit problem from our perspective…..in that interest rates should have been going up instead of down. Of course our government in no way helped at all but should Germany take a small part of the responsibility for the cheap credit problem?? Especially in relation to Greece……again many arguments for and against and it really depends on each individual country but it is comething to consider. As well the PIIGS cannot devalue causing further headaches. I am not for 1 minute advocating leaving the euro I am just making the point of shared accountability.
@2Pack
I thought our share was around the €500 million mark?
April 29th, 2010 at 9:45 am
@ De Roise
our share will be about 1.2bn if the bailout increases to €100-120bn per the IMF ’suggestion’.
April 29th, 2010 at 10:02 am
@Eoin
gotcha…..that is spread over 3 years??
April 29th, 2010 at 10:20 am
The caveats seem to destroy the Peterson Institutions main conclusions on the net benefit to countries. The data they produce is instructive.
A question must surely be how much non-EU banks and investors with operation in the EU might benefit from the ECB repo operations.
Caveats aside, the Peterson Institute’s hypothesis comes close to making sovereign debt and private debt equivalent. This makes perfect sense to me when I think of how many times the same piece of money is taxed and how the money is used as it circulates within an economy. It is hardly a radical move on the part of the Peterson Institute.
This is the same logic that applies when the Minister for Finance talks about there being little benefit in defaulting on ourselves. “Who are the bondholders?” is clearly a hugely significant question as is “Who are the depositors?”.
We know who one of the biggest depositors in Anglo is - the ECB. Is the ECB going to try and take back its money before the Guarantee expires? How would the debt to the ECB be enforced over time? The Germans will want their money back but you can’t get blood from a stone. Will they get our gas fields?
Lenihan’s stressing of the importance of the ECB accepting bonds for repo becomes more understandable in light of the Peterson Institute’s analysis of the ECB’s exposure to Greek debt.
April 29th, 2010 at 10:24 am
@ Zhou
“How would the debt to the ECB be enforced over time? The Germans will want their money back but you can’t get blood from a stone. Will they get our gas fields?”
The ECB loans are all collateralised repo operations. In other words, if a bank doesn’t may them back, they just get to keep the collateral that was pledged. So no need for gas fields.
April 29th, 2010 at 10:29 am
@ De Róiste
Our share is 1.6% of any EU pledge, that is heading for €1.6bn-€2bn based on the latest numbers from the IMF.
Your €500m was actually €400m but that number is SooOOOOoooOoooOOOoo Yesterday morning dude.
April 29th, 2010 at 10:31 am
“Irish banks hold €8.6 billion in Greek debt. At an exchange rate of €1 = $1.31, this translates into €6.6 billion”
Typo there, I think?
April 29th, 2010 at 10:36 am
Thanks Enda. Typo fixed.
April 29th, 2010 at 10:39 am
@KW
I am assuming that the “collateral” for the ECB deposits in Anglo is the Govt Guarantee. If it is not extended then presumably the ECB will demand the money and if not paid the Guarantee will be enforceable in the future.
April 29th, 2010 at 10:45 am
@ Zhou,
Caveats aside, the Peterson Institute’s hypothesis comes close to making sovereign debt and private debt equivalent.
I was listening to the George Lee lecture linked from Stephen Kinsella’s blog. George Lee observed in his lecture, how Ireland gave up its economic policy instrument when we joined the single European currency. Every year, Ireland sent its homework to Europe to be assessed and every year, Ireland would get a gold star, because we were the best student in the class. So for years and years, Ireland’s structural problems (with regard to the revenue the Irish government simply assumed would always be there, €100k tax take per house being built in Ireland - Ireland was building many times the no. of houses per head of population the UK even was building with its construction boom) were not identified by Europe. And now Europe has taken away our gold star and told us, it’s our fault that we stepped on a landmine. BOH.
April 29th, 2010 at 10:53 am
@ Zhou,
The other thing that George Lee mentioned, is the fact the EU zone was set up to allow free movement of capital and investment. This is where the private debt aspect of things comes in. It was the private banking institutions who created the private debt. George Lee noted in his lecture how Fingleton was challenged at one point, and told he shouldn’t be offering loans at 5 times earnings to individuals. But Fingleton got his way, arguing that if people didn’t get credit through Nationwide, they would simply get it somewhere else. While Europe was giving a gold star to Ireland for its sovereign book keeping. There was noone looking at how private debt was being created. BOH.
April 29th, 2010 at 10:55 am
@ De Roiste
correct. 450mio in year 1, then 400mio in year 2 & 350mio in year 3 would be the assumption (as Greece is reducing down their deficit they should require less each year)
April 29th, 2010 at 11:03 am
The exposure of Irish banks to Greek debt is “negligible” at less than €40 million, Minister for Finance Brian Lenihan told the Dáil last night - - Irish Times
April 29th, 2010 at 11:19 am
Thanks Michael.
April 29th, 2010 at 12:08 pm
“The ECB loans are all collateralised repo operations. In other words, if a bank doesn’t may them back, they just get to keep the collateral that was pledged. So no need for gas fields.”
Is a repo of this sort non recourse? If the security did not cover the amount lent - despite whatever haircut it was lent at - would the ECB not become a creditor for the balance in any wind up?
April 29th, 2010 at 12:24 pm
@ Zhou
In anglo’s last annual accounts (from about a year ago) it states that the securities under repo with the ECB were covered bonds, a type of asset backed security.
April 29th, 2010 at 12:54 pm
@GK/christy
I understand the ECB has substantial deposits with Anglo apart from any repo operations. They are two different issues.
April 29th, 2010 at 12:58 pm
@Christy
“Is a repo of this sort non recourse? If the security did not cover the amount lent - despite whatever haircut it was lent at - would the ECB not become a creditor for the balance in any wind up?”
It only has recourse to the collateral. Indeed, it is not really a collateralised loan at all. The bank sells the assets to the ECB with an agreement to buy them at a slightly higher price at a fixed point in the future. If the bank doesn’t exist, it cannot buy them back.
The wrinkle comes in that it is not the ECB in Frankfurt that takes the loss, but the National Central Bank. The NCB has as its backstop… eh, the taxpayer… Roll up, roll up, the magician is here…
April 29th, 2010 at 1:45 pm
@zhou
“I understand the ECB has substantial deposits with Anglo apart from any repo operations. ”
Are you sure?
I didn’t think the ECB had ‘money on deposit’ as such. The banks deposit reserves and excess liquidity with the ECB, but that is the reverse. Minister Ryan has confused the two in the past as have other ministers…
April 29th, 2010 at 1:45 pm
@Zhou
I think you are confusing the ECB with the Irish Central Bank which has made substantial advances to Anglo which we (the Irish people) can wave goodbye to.
April 29th, 2010 at 2:00 pm
You missed non-financial institutional holdings, i.e. pension funds. Although Greece has dropped off a couple of sovereign bond indexes over the last year (still in Merrill Lynch products). At around 5% of Euro sovereign issuance, we might make a broad assumption that 5% of fixed income allocations are or were in Greek sovereign debt.
Say an average 30% bond allocation to €70bn under maangement, might give a guess of around €1 billion in holdings.
April 29th, 2010 at 2:16 pm
Thanks Geckko, useful analysis. BOH.
April 29th, 2010 at 2:16 pm
@ Karl - you are of course right to highlight the fact that Irish holdings of Greek government debt may be small. However, I am not so sure that this should make us feel comfortable right now. There have been ongoing reports of runs on the Greek banks and one suspects that they are finding it very hard to raise funds. If there is meltdown in Greece we will get hit via the financial sector debt. Looking at debt holdings of PIIGS countries in other PIIGS makes for interesting and worrying reading!
April 29th, 2010 at 2:48 pm
@YM/MOL
you have me all confused now
April 29th, 2010 at 3:22 pm
@Zhou
Sorry for the lack of clarity.
ECB repo operations are based on qualifying securities so the ECB basically cant lose (unless it gets stiched up with a load of Greek debt).
So the ECB doesn’t have to worry about Anglo.
The Irish Central Bank has from memory advanced about 7 billion to Anglo. This is as far as I see totally unsecured, except for the government guarantee, and so that money has effectively been already flushed down the toilet.
April 29th, 2010 at 3:46 pm
“Second, I believe the definition of Irish banks here include Irish outlets of non-Irish banks (such as various IFSC institutions) which are not receiving assistance from the Irish government.”
This same confusion between Irish banks and Irish outlet of non-Irish banks is at the heart of inaccurate figures about this county’s external indebtedness. It is still reported in some places that Ireland’s external debt is around 1,000bn which is the highest in the world (next to Iceland). As Rossa White of Davy has shown, the figure includes the IFSC outlets and the true figure in 350-400bn.
April 29th, 2010 at 4:35 pm
I asked this question in a previous post, Ill ask again here.
If the 5% interest recieved over the Greek loan upon (given Greece doesn’t default on this, which it probably will anyway) falls below the interest paid on Irish government bonds during an extended period, will we be making loss? How large could that loss be? Does it also depend on the term of the rescue loan’s maturity?
Lenihan made the argument that this is a loan, not a bailout. It seems to me this ‘loan’ is going to be potentially seriously loss-making.
April 29th, 2010 at 5:26 pm
@ Seb
If the interest rec. > the cost for us of raising funds for the same tenor then yes it will be loss making, albeit a very small loss in the greater scheme of things. A small price to pay in the name of solidarity, after all we may be in a very similar situation very soon.
All in favour of the ECB buying sovereign debt say aye!
April 29th, 2010 at 8:59 pm
@GK
“All in favour of the ECB buying sovereign debt say aye!”
If it just delays the inevitable - I’m a nay
April 29th, 2010 at 10:04 pm
@Zhou
I share your confusion. When I was told “ECB money is securitised on the banks assets” (or something) I was wondering..what precisely is a “qualifying security”?
April 29th, 2010 at 10:49 pm
The “Irish” holdings of Greek debt are nothing like the billions quoted. German and Belgian banks in the IFSC, some of which have been nationalised, account for the apparent number, afaik.
Any more detailed post is likely to be removed, in my experience.
April 29th, 2010 at 11:46 pm
Sarah, if you really want to know what a qualifying security is, you can browse this to your heart’s content.
http://www.ecb.int/paym/coll/html/index.en.html
Hours of fun for all the family.
April 30th, 2010 at 7:11 am
@Edgar Morgenroth - “There have been ongoing reports of runs on the Greek banks”
May I ask if you could tell me where you have been reading that (as I would like to keep my eye on that aspect)? I’m not aware that the general public have been taking their money out of accounts and stashing it under the proverbial mattress. Are you talking about ‘institutions’ removing their money from Greek banks (mind you, I would be surprised if that hadn’t already happened)?
A general run on the banks would be very worrying. Could you imagine the protests in Athens if there were a banking ‘holiday’/closure or cashpoint machines all suddenly stopped working? That would result in “changing the course of history” stuff in the current climate. A bit like Brown’s gaffe the other day. He didn’t so much shoot himself in the foot as the head. Funny how one small thing can alter the course of nations.
April 30th, 2010 at 9:37 am
@ KW,
thanks for that ECB link Karl. Interesting web page. BOH.
April 30th, 2010 at 10:02 am
@Joseph - the first reports of a run on Greek banks appeared in the German press and on German TV a few weeks ago. I heard it again this week (can’t remeber where). These reports have been vague and of course they could be nasty rumours, that make someone a lot of money. If however there is a real run, which at this stage must be a possibility, then all bets are off. From what little I know the Greek banks have been well run and they have little exposure to other PIIGS debt, but they might nevertheless get caught up in this.
May 2nd, 2010 at 12:56 pm
Debt graph in the NY Times during the week.
http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global-home
Is this correct? I had thought that the debt for Ireland that they are talking about stemmed from the IFSC which isn’t included in most media when they talk about Ireland debt exposure?