Last year we showed that the ECB exposure to the PIIGS totalled €444bn. Just a year later this has increased by a whopping 106%, to €918bn. The exposures are detailed below:
Total exposure - €917.61bn
Exposure through lending programmes - €703.61bn
Greece - €73.4bnExposure through the Securities Markets Programme - €214bn
Ireland - €85.07bn
Italy - €270bn
Portugal - €47.54bn
Spain - €227.6bn
This gives the ECB a massive leverage ratio 38.4:1. This in itself is not the issue, more concerning is the fact that a third of the ECB’s balance sheet now resides in the PIIGS.
On top of this, while the ECB’s exposure has been rising the quality of collateral supporting this exposure has been deteriorating quickly. There are a few factors underlying this:
- The value of the huge amount of PIIGS sovereign bonds which PIIGS banks hold has fallen while the default risk involved with them has risen quickly.That is to name but a few of the issues in play (we'll have a fuller discussion of the implications of this next week).
- The sovereign guarantee which backs up many of these banks (both explicit and implicit) has also become less solid as the states’ finances worsen and public outrage against bank bailouts increases.
- The risks and losses held on the balance sheets of these banks is yet to be fully acknowledged or fully realised in many cases. (For example, see our recent briefing on the massive problems in Spanish banks relating to their exposure to the bust real estate and construction sectors).
- The ECB has widened its collateral scope allowing even more opaque and harder to value collateral to be used to bank up its unlimited liquidity provision.
The real question which should be asked in all this is: how has the eurozone crisis continued to worsen despite the ECB more than doubling the money it has poured into these states?
Patently, the current approach to the eurozone crisis has failed. Even the ECB’s massive interventions only bought a short amount of time (and a lot less than many may have expected). The eurozone continues to fiddle at the edges of the crisis. All the talk of ECB lending, eurozone firewalls, IMF resources and austerity programmes fails to accept some of the fundamental flaws which underpin this crisis.
The eurozone needs to accept that there are a few structural flaws underpinning the eurozone crisis and move to correct them, not least: an endemic lack of competitiveness in the peripheral states, a structural bias towards low growth, a massively undercapitalised banking sector, mismatched monetary policy and a currency which remains grossly overvalued for many of its members. Until these issues are tackled, with both widespread political and economic will even further sprays of ECB liquidity will do little more than buy time, while further raising the cost of the potential break-up.
The figures on exposure through lending programmes were obtained from the websites of the national central banks of: