Tag: Greece

Ireland’s Exposure to Greek Debt

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.

Greek Bailout Unveiled

So finally we see the terms of Greece’s impending bailout. €30 billion to be made available from EU countries (€500 million potentially from Ireland) at an interest rate of about 5%. Apparently, a further €15 billion is available from the IMF. To my mind, the interest rate is a bit lower than might be expected for an emergency bailout that should be acting as a serious incentive to get the Greek fiscal house in order. The operation certainly seems to be slanted towards carrot rather than stick.

What next? Peter Boone and Simon Johnson discuss this issue and are not confident that Greece can emerge from the crisis with access to private debt markets. They worry about Portugal being next. We worry about something else.

The Impending EU\Greece Deal

It appears that a deal involving the EU and Greece is imminent. Greek bond yields hit their peak level in the current crisis, the ECB has altered its rules for collateral and the media are reporting that a deal is in place (here and here.)

The FT reports on the negotiations over the terms of the deal:

Officials added that Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates of 6 per cent or more, though this could lead to different rates being charged by other countries.

One said the agreement “reflects high rates … it is not a ‘subsidy’ and thus not a climbdown. Not even the Germans regard most recent rates as market rates”.

The FT also editorialises on this, blaming the Germans for failing to calm the bond markets sufficiently:

Berlin is also adamant liquidity support be given at market rates. This makes no sense: a rescue is needed precisely when debt markets cease to function and refuse to refinance Greece at sustainable rates. Insisting that a rescue takes place at “market rates” is to insist no rescue takes place at all. Market yields reflect this contradiction, and show that Europe has not yet put its money where its mouth is.

I have a tendency to question agreed wisdom so let me play the role of academic devil’s advocate here for a second. Ultimately, Greek fiscal stability will require a combination of lower spending and higher taxes. Yes, bond yields at current levels—if sustained—would be unlikely to be consistent with long-run fiscal stability.

However, a program that

(a) Made it clear that Greece would be able to roll over private sector debt because the EU will intervene to provide the funds

(b) Credibly lead to the adjustments in Greece’s structural deficit.

should stabilise the fiscal situation in Greece and lead to a return to lower borrowing rates for Greece. That the EU should charge a high interest rate for providing the funds for (a) and overseeing the program for (b) is, it could be argued, not unreasonable. Indeed, if the rates associated with (a) are not high enough to be painful then it may be difficult to get much traction going on (b).

Of course, the Greek government is going to look to get the interest rates on its assistant loans set as low as possible. But that doesn’t mean that a percent here or there on these loans is the key issue right now.

The other major unknown here is how any deal will affect the sovereign bond market’s attitude to Ireland.

Greek Bond Yields

The yield on Greek government bonds has now crept up to more or less where it was prior to all the EU meetings of the past few months (see here.) I’m not sure why the various annoucements haven’t helped and newspaper reports like this one and this one don’t explain as much as I’d like.

If the high bond yields are a sign of doubts about whether a rescue is actually going to happen, and thus the debt may be defaulted on, then the eventual arrival of the cavalry (in the form of the EU) to keep the debt rolling over would end up bring the yields down to more sustainable levels and hopefully stabilise the situation. A less sanguine interpretation of current events offered to me by a colleague is that the terms of the deal being offered by the EU—in which any lending would be at current market rates—doesn’t really offer Greece a route out of insolvency because bond yields at this level are not consistent with stabilisation of the public finances.

I’m more inclined to believe the former intepretation and that the EU will prevent Greece defaulting. Whether it should is a different matter.

Greece and the Threat to the Euro

I read time and again, for instance here, that Greece’s debt crisis “threatens the euro”. Indeed, there are lots of right-minded people around Europe who worry deeply about this threat and have determined that a Greek default has to be avoided to save the euro. I’m having trouble, however, figuring out what that this is supposed to mean.

There seem to be different interpretations of what the “threat to the euro” is. The more dramatic interpretations invoke the idea of an existential threat. Others view it as involving reputational harm. I’ll take each of these ideas in turn.

Continue reading “Greece and the Threat to the Euro”