If 'they' decide that Greece will only repay part of the face value of its bonds (let's say seventy per cent) then obviously, that will harm UK banks, but it will harm their European competitors (especially the French ones) far, far more.
Firstly because UK banks invested relatively little in Greek government bonds, but also because the exchange rate gain largely cancels out the default loss.
For example, a UK bank invested £100 in Greek bonds in 2006 when GBP was worth EUR 1.46, it gets EUR 146 in bonds. Let's assume that the Greek do an official default and say that they will only repay seventy cents in the EUR, so the UK bank receives EUR 102.2. The UK bank converts this into GBP at today's exchange rate of 1.15 EUR per GBP, hey presto, its net proceeds are £88.87.
Sure, that's still a loss of 11%, all very ugly, but nothing that UK banks wouldn't survive. But the French and other European banks will be looking at losses of 30% without any currency gain and on larger underlying amounts, and given that banking is a highly leveraged business, losing 30% is not three times as bad as losing 11%, it's ten times as bad.
UPDATE: there's a fair summary of who owns how much in Greek bonds at The Independent.
Tuesday, 25 October 2011
Why UK banks should welcome a partial Greek default
Subscribe to:
Post Comments (Atom)
9 comments:
Although it would depend on how the bank hedge its currency exposure.
H, true, but with whom have they hedged it? Somebody somewhere must get the corresponding gain.
hmm, the relativities you set out are obviously correct, but it's what the eurozone politicos do in response - that's the next & bigger issue
tiens! SocGen is in the merde, better give them €50 bn of free money and protect them against the rapacious anglo-saxons, see if we can't close the City of London: "Common Banking Policy" has a nice ring about it ...
It surprises me that banks have been left holding Greek bonds. Doesn't say much for their risk analysis surely.
AKH, I think their risk analysis went something like: these debts are in euros, ergo we are really borrowing the money from Germany.
They seem to have got a bit confused between Germany standing behind the currency, and Germany standing behind the debts.
ND, AKH, I've updated the post to link to an article which says that French and German banks own EUR 9 and EUR 10 bn respectively, what's thirty or forty per cent of that? Naff all in today's money.
AC, or possibly their risk analysis went like this: if it goes wrong, some government or other will bail us out.
A greek default would make a spanish and irish default more likely.
AC1
I think the risk ananlysis goes more like this.
If we dump those bonds the bureaucrats will regulate us even more harshly (Banks have masses of regulation, the credit market does not).
AC1
@H and @Mark
Indeed, being long a euro denominated bond implies being short on sterling so on a pure currency basis, sterling losing value over the past few years means the par value of the euro bonds has increased. Whether the Uk holders hedged the currency exposure to be neutral (implying a 1:1 haircut) or otherwise is unknown. I'm sure they all hold CDS in which the risk is passed to the counterparty. Or in other words, who really knows what the real value and with whom a Greek bond haircut lies? A chart of bondholders without currency hedging & CDS analysis gives little real insight.
Post a Comment