Business World

Thursday 22 February 2018

German and French banks call the shots

THE latest figures from the Bank for International Settlements (BIS) show that Ireland owes banks in other EU countries a massive €310bn, with €196bn of this money due to banks elsewhere in the eurozone.

These huge exposures almost certainly explain why the ECB has refused to countenance "haircuts" for the senior bondholders of the Irish banks.

One of the salient features of the Irish banking crisis since it first erupted two-and-a-half years ago has been the dogged refusal of the ECB to allow us to impose haircuts or discounts on the holders of the senior bonds of the Irish banks. This was despite the fact that these senior bonds were trading at a significant discount to their face value.

Instead, for reasons best known to itself, the ECB -- in clear contravention of both previous market precedent and financial logic -- has insisted that the senior bondholders be repaid in full and has lent the Irish banks, institutions which it must have known were hopelessly insolvent, €70bn to do so.

So why has the ECB been so solicitous of the interests of the senior bondholders. The most recent figures from the Bank for International Settlements, the umbrella body for the world's central banks, provide us with some clues.

At the end of September 2010 Ireland owed the banks of other EU member countries €310bn, of which €196bn was owed to banks in other eurozone countries.

In fact the underlying situation may be even worse than even these figures indicate as they exclude €123bn of "other exposures", mainly derivatives and government guarantees that could become payable. As we in Ireland know only too well, government guarantees have a nasty habit of coming back to bite the guarantor.

Of these other exposures, €78bn are potentially payable to banks in other eurozone countries.

While the fact that Ireland owes UK banks €113bn with other exposures of €45bn hardly comes as any surprise given the large presence of British banks in the Irish banking market, the extent of our debts to banks from other eurozone countries isn't so widely known. So to whom in the eurozone do we owe all of this money?

Top of the list are German banks, to whom we owe €92bn with a further €38bn of other exposures. Does the fact that Irish banks potentially owe their counterparts up to €146bn explain the German government's implacable opposition to any write-down of the Irish banks' debts? After the British and the Germans, it is the French banks -- with total Irish bank loans of almost €32bn and a further €23bn of other exposures -- who have the biggest exposure to Ireland. Does this provide at least a partial explanation for French president Nicolas Sarkozy's truculence when faced with Irish requests that senior bondholders be forced to accept a haircut?

The Spanish and Italian banks have relatively small exposures to Ireland with direct loans to this country of €9.2bn and €10.6bn respectively as well as other exposures of €3.2bn and €6.4bn.

However, there is one other large European creditor listed in the BIS statistics. This is the unspecified "other euro area". The banks from these countries are directly owed almost €42bn by their Irish counterparts with a further €6.1bn potentially due under the other exposures heading.

Who are these other euro area banks? Up to now the general assumption had been that this heading mainly covered Dutch, Belgian and Luxembourg banks. But given the sudden emergence of Finland as one of the most vehement opponents of cutting Ireland any slack I can't help wondering if one or more of the Finnish banks have large piles of Irish debt sitting on their balance sheets.

What is clear from the BIS figures is that a complete collapse of the Irish banking system would have had very serious consequences not just for British banks but also for banks elsewhere in the eurozone.

This almost certainly explains the ECB's phobia of any "contagion" caused by imposing a haircut on holders of senior bonds in the Irish bank bonds.

It also gave the Irish government serious leverage, if it had chosen to exercise it.

On the basis that if you owe the bank a million euro it is the bank which has a serious problem, the Irish banks owing other EU banks up to €433bn should have meant that it was the other EU banks who had a problem. Why wasn't this leverage employed in the run-up to this week's publication of the results of the stress tests on the Irish banks? Was there a failure of nerve on the part of the new Irish government?

If there was then it is one that we as taxpayers will be paying for well into the future.

Sunday Indo Business

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