Showing posts with label banks sovereign exposures. Show all posts
Showing posts with label banks sovereign exposures. Show all posts

Monday, January 11, 2016

11/1/16: Dealing with Systemic Sovereign Debt Crises: IMF's Animal Farm Model


IMF brainiacs have been struggling over time to develop some sort of a coherent framework for managing the fallouts from systemic sovereign debt crises. So far, the golden rule has ben elusive for them. However, following the Cypriot and Greek experiences with private sector bail-ins and realising the direct connection between these experiences and the cases of other peripheral Euro area states, most notably Ireland and Portugal, the IMF have been coming around to the idea that while all countries are ‘equal’, some are ‘more equal’ than others. In other words, that in the world where might is right, there are two tiers of countries: those that get whacked and those that get properly rescued.

Behold the IMF’s latest thinking on the subject. Sandri, Damiano of IMF’s research department authored a new working paper, titled “Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins or Official Transfers?” (October 2015, IMF Working Paper No. 15/223: http://ssrn.com/abstract=2711133).

It says what it does: “The paper presents a …model to understand how international financial institutions (IFIs) [read IMF and European ESM/EFSM/EFSF and so on] should deal with the sovereign debt crisis of a systemic country, in which case private creditors' bail-ins entail international spillovers.” Notice the emphasis on ‘systemic’ country. In other words, ‘not the ordinary fry’ like smaller ‘peripherals’.

“Besides lending to the country up to its borrowing capacity, IFIs face the difficult issue of how to address the remaining financing needs with a combination of fiscal consolidation, bail-ins and possibly official transfers. To maximize social welfare, IFIs should differentiate the policy mix depending on the strength of spillovers. In particular, stronger spillovers call for smaller bail-ins and greater fiscal consolidation.” Which simply says: more systemic is a country, less risk of bail-ins, so if you are a French or a German depositor or lender, you are lucky. If you are a Belgian or Irish depositor or lender, tough sh*t, mate.

“Furthermore, to avoid requiring excessive fiscal consolidation, IFIs should provide highly systemic countries with official transfers. To limit the moral hazard consequences of transfers, it is important that IFIs operate under a predetermined crisis resolution framework that ensures commitment.” Oh, what this means is that systemic countries get bailed out via official sector (IMF et al) burden sharing. Small countries - get screwed by not having access to such largess.

Here’s more beef from the paper:

“…consider the optimal policy mix to address the financing needs of a non-systemic country, for which bail-ins do not entail international spillovers. In this case, besides lending to the country up to its borrowing capacity, IFIs should use only fiscal consolidation and bail-ins.” In other words: small country gets only funds sufficient to cover its standing allowance under the normal rules and not a penny more. Rest of ‘rescue’ funds should be squeezed out of the country economy. “Official transfers should …be avoided because they do generate severe moral hazard since they are not priced into countries’ ex-ante borrowing rates.” Which simply says: look, bailing out through official burden sharing will not increase fiscal pain for smaller countries as yields on government debt are not going to rise high enough.

So, please, whack these small countries harder, to teach them a lesson and who cares about their economies and people. Lessons matter, you peasants.

Now onto systemic countries case: “Dealing with the sovereign debt crisis of a systemic country, …a first implication is that bail-ins should be used to a lesser extent since they are more socially harmful due to the associated spillovers. If IFIs are prevented from providing transfers, any reduction in bail-ins would need to be offset entirely through an increase in fiscal consolidation. In this case, systemic countries might be required to endure an excessive amount of consolidation to spare the international community from the systemic consequences of bail-ins. When dealing with systemic countries, it may thus become efficient to compensate the reduction in bail-ins not only through greater fiscal consolidation, but also with official transfers.” So in simple terms: if you are a big country, you will be treated entirely differently from a small country. Never mind that moral hazard thingy - systemic countries get official sector burden sharing, lending over allowed capacity and less bail-ins pressure.

Of course, the IMF Working Paper is not reflective of the Fund official position, as disclaimers go. So this paper is nothing more than a ‘discussion’ of what should take place, rather than what will take place. But, of course, we all know one simple fact: in the world of IMF, some countries are ‘more equal’ than others.


Monday, October 21, 2013

21/10/2013: Uneasy Links: Banks and Sovereign Bonds Exposures


IMF recently warned about growing own-sovereign exposures of European banks when it comes to government bonds holdings. FT echoed with an article: http://www.ft.com/intl/cms/s/0/9b6fb558-3270-11e3-b3a7-00144feab7de.html

Per FT:

  • "...Government bonds accounted for more than a 10th of Italian banks’ total assets at the end of August, the last month for which data are available. That is up from 6.8 per cent at the beginning of 2012, according to data from the European Central Bank."
  • "In Spain the proportion has risen to 9.5 per cent, up from 6.3 per cent over the same period…"
  • "… in Portugal it has increased to 7.6 per cent from 4.6 per cent."

"By far the majority of the increases – which occurred steadily month-on-month – are in holdings of bonds issued by banks’ own governments." So overall, "Government bonds, as a percentage of total eurozone bank assets, have grown to 5.6 per cent from 4.3 per cent since the beginning of 2012."

Lest we forget, there is a strong momentum building up in Europe to do something about the problem of European banks over-reliance on sovereign bonds - a momentum driven by lower debt countries with significant exposures to Target 2 imbalances. At the end of September, ECB's Governing Council Member Jen Weidmeann said that "The time is ripe to address the regulatory treatment of sovereign exposures," Weidmann wrote in an opinion piece published on the website of the Financial Times. "Without it, I see no reliable way of breaking the sovereign-banking nexus." (see here: http://www.efxnews.com/story/20978/ecb-weidmann-time-end-preferential-treatment-gov-debt?utm_content=bufferffb97&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer)

Basically, removing automatic zero risk weighting on sovereign bonds, especially for the weaker peripheral sovereigns will be a major problem for the European banks and can precipitate a strong sell-off of the sovereign bonds. I suspect it will be unlikely to take place in the current environment. But gradual shift toward such an approach can easily take place.

Another recent article highlighted the shift away from foreign lending by European banks on foot of the growing sovereign debt exposures: http://www.voxeu.org/article/impact-sovereign-debt-exposure-bank-lending-evidence-european-debt-crisis

Based on Forbes data,

  • BNP Paribas has total assets of USD2,668 billion, with USD43.1 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.62% of total assets);
  • Deutsche Bank has total assets of USD2,545 billion, with USD16.2 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
  • HSBC has total assets of USD2,468 billion, with USD6.7 billion in peripheral (ex-Cyprus) Government bonds (0.27% of total assets);
  • Barclays has total assets of USD2,328 billion, with USD29.2 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.26% of total assets);
  • RBS has total assets of USD2,266 billion, with USD3.5 billion in peripheral (ex-Cyprus) Government bonds (0.15% of total assets);
  • Credit Agricole has total assets of USD2,131 billion, with USD19.1 billion in peripheral (ex-Cyprus) Government bonds (0.89% of total assets);
  • Banco Santander has total assets of USD1,610 billion, with USD69.6 billion in peripheral (ex-Cyprus) Government bonds (4.32% of total assets);
  • Lloyds has total assets of USD1,546 billion, with USD0.1 billion in peripheral (ex-Cyprus) Government bonds (0.01% of total assets);
  • Societe Generale has total assets of USD1,512 billion, with USD9.7 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
  • Unicredit has total assets of USD1,232 billion, with USD54.3 billion in peripheral (ex-Cyprus) Government bonds (4.41% of total assets)

Two charts highlighting the plight of Spanish and Italian banks in terms of their sovereign bonds exposures (first) and the levels of LTROs exposures: