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EU banks’ €200bn exposure to sov debt

Friday 15 July 2011 – by Jacqui Street

The European Banking Authority has calculated the exposure of European banks to the current sovereign debt crisis in Greece, Ireland and Portugal at €200bn ($283bn) but admits it has not addressed the possible side-effects to banks if the crisis spreads.

The stress test analysis by the EBA shows that the majority of banks exposed to sovereign debt are actually domestic banks.

For instance, EU banks have a combined exposure of €98.2bn ($140bn) if Greece defaults, but about 67 per cent of that exposure is held by Greek banks.

For Ireland, EU banks have a combined exposure of €52.7bn ($74.6bn) with 61 per cent held by domestic banks, and while there is an exposure to €43.2bn ($61.1bn) of Portuguese sovereign debt, 63 per cent of that debt is held domestically.

The EBA notes that “even under harsh scenarios” it would be home banks of countries experiencing the worst credit spreads.

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“In such cases the capital shortfall should be easily covered with credible backstop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece,” says the EBA.

But the EBA says its analysis of exposures to the sovereign debt crisis does not take into account the knock-on effects of downturns in investor confidence and on EU banks and non-bank entities. The EBA and warns that these effects may be “significant”.

There was no mention of exposure to sovereign debt in Spain or Italy. The calculations were made to the end of 2010 and did not take into account the worsened sovereign conditions in 2011.

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