sexta-feira, junho 22, 2012

US and UK banks increased potential exposure to Portugal in 2011

Debt workout 101 - part 9

According to the BIS statistical annex, US  and UK banks increased their potential exposure (consisting mostly of credit derivatives)  to banks in Eurozone periphery such as  Portugal and Spain,  in 2011,  even as most international banks reduced their overall direct exposure.

Portuguese and Spanish banks lost -15.9% and -17.2% of their  direct interbank funding in 2011, which dropped to USD 170 Bln and USD 586 Bln respectively, as international banks took advantage of the emergency liquidity provided by the ECB to cut their cross-border lending.
But, in contrast to Greece and Ireland, the indirect or potential exposure increased +10.6% to USD 102.9 Bln to Portuguese banks and +24.1% to USD 346 Bln to Spanish banks.

More than half  of this "potential exposure",  consisting mostly of CDS credit derivatives and other forms of guarantees, is concentrated in US banks which increased their involvement sharply in 2011, mostly with Spain, even as credit default swap pricing jumped. 

If we assume that this "potential exposure" is not speculative but serves to backstop direct credit exposure, then the concentration of exposure in US banks  increased  from 22.8% to 34.7% in the case of Portugal and from 25.2% to 38.9% in the case of Spain ,  "among responding banks from 24 countries". 

It is important to note that this increase in "potential exposure" represents only a tentative  re-allocation of credit risk among creditors and guarantors, and that it generates no new credit availability for these distressed economies.   Being outside the Eurozone, UK and US creditors  had already been spared by not having to contribute to the European bailout pots. 

One might say that the CDS credit insutance industry even faced issues of credibility, as they collected huge fees but hardly ever had to pay out. The presence of so-called guarantors increases the risk of moral hazard and  greatly complicates the necessary orderly debt workout
Will they or won't they pay?  "Show me the money", one might say.

The fact that the buyers  bought more credit protection in 2011, even as swap prices rose, indicates that they believed that future haircuts might no longer be as "voluntary" as in the past,  and thus that CDS may actually come to represent value-for-money as triggers take effect. 

Mariana Abrantes de Sousa 
PPP Lusofonia

Sources:   BIS quarterly statistical annexes,,
See also... bank exposures in 2010 as reported to the BIS
US banks sold more swaps on European debt as risks and prices rose
Banca europeia retira da periferia
Deleveraging of Eurozone banks since 2008
Eurozone woes are US woes
Gran banca europea saca dinero de España
Obama preocupado ...miles de millones en derivados ...
Bundesbank TARGET2 credit balances keep rising as capital flight is fed by concerns over Euro convertibility, pointing to the need for EU Deposit Guarantee Scheme

17 comentários:

  1. It is important to call attention correctly to the origins of the cross-border credit bubble, as banks recycled export surpluses under the distracted (im)prudential supervisin of the national central banks, followed by a cross-border credit crash. Incoming and outgoing tsunamis of hot money, as seen from the periphery.
    Instead of creditors and debtors getting down to orderly debt workout negotiations and agreeing to share the losses 50/50 or thereabouts, everyone went to great pains to design a non-default which resulted in a non-bailout.

    Guarantors and shareholders were spared, as creditors had all the time they needed to lay-off their exposure on official creditors. But the muddle also allowed the problems to fester and spiral out of control, fed capital flight and increased the risk of disorderly defaults.
    Meanhwhile, US and UK banks have increased their support, that is their "potential exposure", according to the BIS. Someone out there still believes in the Eurozone...
    PPP Lusofonia

  2. .."certain countries went on a borrowing binge" because certain other countries went on a lending binge...
    Can´t have one without the other.

    Banks intermediated the cross-border credit bubble, with leverages as high a 49X, made possible by BASEL. Now, they have to intermediate the credit crash, that's their lot in life, to take losses for their bad credit decisions.

    And another question, with no real interbank funding, what does Euribor represent nowadays, FIBOR?

  3. The unwinding of a credit bubble is not a pretty sight.
    It's more of a motorway pile-up in (artificial) fog.
    Complete with rubber-neckers and "mirones", onlookers standing on the side and making money from the disaster.

  4. Quem não quer fazer análise de crédito, compra CDS ... aos bancos US e UK
    Como em qualquer apólice de seguro, cuidado com a letra pequenina

  5. Even if credit derivatives do not cause the credit bubble directly, see
    , the presence of gurantors may increase the risk of moral hazard and complicate the post-crash debt work out negotiations

  6. The flip side of the declining private sector exposure (to distressed Eurozone countries)
    is that official sector exposure is increasing rapidly.

  7. Metade dos créditos à habitação,€62 mil milhões, foram refinanciados e hipotecados ao BCE.

    O BCE tenta assim compensar a desintegração do mercado inter-bancário europeu.

    Pode ver a ser conhecido como Frankie Mac

  8. IN Eurozone Crisis Explainedm the BBC says:

    "So what really caused the crisis?There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector - companies and mortgage borrowers - who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom."

    Does the BBC believe in virgin birth?
    Or just when it comes to the Eurozone credit bubble?
    And cross-border creditors had nothing to do with it?
    How do you say DNA tracing in international banking terms? S.W.I.F.T.

  9. It is a bit late to warn about th transfer of wealth, as the bailout funds allowed distressed borrowers to reimburse doubtfull and impaired loans at par.

    When the Eurozone credit bubble burst in 2009, overextended cross-border creditors and investors were positioned to take significant losses on their excessive exposure to overleveraged private and public borrowers in the Cohesion countries. These creditors, and guarantors including the sellers of credit default coverage, were the real beneficiaries of the wealth transfers which have taken place thus far. The size of haircuts and debt forgiveness which benefitted the borrowers have been much smaller by comparison.

    Some (US and UK) banks liked this business model of shifting exposure to official creditors so much,that they actually increased their involvement.

  10. Three years after the sudden-stop when cross-border hot money lenders and investors began cutting their exposure to distessed Eurozone countries, the ECB has (re)discovered the debt workout principle of burden sharing between a borrower and its (senior) creditors.
    To the extent that the withdrawal has allowed the fleet-footed cross-border lenders to mutualize or shift their credit exposure to super-senior official creditors, this could again leave the flat-footed local private sinvestors to take a (disproportionately) large share of the haircut.
    Like the CAC-ing of the local Greek investors which were did not contribute to the cross border credit bubble, from the periphery this looks like "dejá vu all over again".
    WSJ on ECB (re)discovery of burden sharing principles 

  11. Jogos entre credores e devedoresterça-feira, 17 julho, 2012

    Isto parece o jogo da vermelhinha (3-card monte), quem é que tem o risco, quem é que tinha o risco, onde é que ele está agora?

    Ou então o jogo do empurra, agora pagas tu, agora paga ele, eu é que não vou pagar nada...

    Ou então o jogo da batata quente, agora agarra tu, agora agarra ele...

  12. Entre os nossos credores. O mais expostos à dívida externa espanhola são os bancos americanos, com 24% (175,900 milhões de euros). Na Europa, a pior parte são as principais instituições financeiras na Alemanha, com uma exposição de 20% ou 143.800 milhões. O risco de França é menor, já que seus bancos estão jogando com a Espanha 111,400 milhões de euros (15%), enquanto os bancos britânicos exposta a nossa dívida externa em torno de outros 15%, totalizando 106.300 milhões.

  13. Government bonds are NOT really risk-free, get over it.

    Especially when said Government bonds are denominated in a currency the borrower doesn't control and held in cross-border portfolios, which implies both currency and transfer risk, in addition to the credit risk.

    Best to stop following the BASEL credit-by-numbers gnomes and do some proper sovereign credit analysis.

    Otherwise, the "Pain OF Spain" will fall mostly "am Main", on the Thames, "sur la Seine" ...

    Even on the Hudson, considering the increase in potential exposure by US, according to the BIS.

  14. Germany, under the guise of economic moralism continues to promote a perverse form of fiscal austerity which has the benefits of minimising the damage to its own banking sector.

  15. De Janeiro a Maio 2012, os empréstimos dos bancos alemães a Portugal, Grécia, Irlanda, Itália e Espanha caíram 55 mil milhões de euros, para um total de 241 mil milhões de euros.

    o valor mais baixo em 8 anos

  16. German Constitutional Court set as conditions for the ratification of the ESM by Germany. It ruled that the €190 billion ($245 billion) limit on Germany's liability for the must continue to apply, which is considerably less that the exposure of German banks at end 2011 of €285 billion.

  17. Talk of the UK having a foot out of the EU make interesting reading, but an analysis of the sharing of the gains from trade would show it makes most of the difference.
    A proper analysis would show that few countries have benefitted as much as Britain from the Euro.
    British based banks had fed the credit bubble and had the second highest exposure to the Eurozone Highly Indebted Countries in 2010, after the German banks.
    So the German, British and French creditors were the ones who benefitted the most from the ECB decision fo provide funding for the cross-border debt as it came due, rather than to force a refinancing.