In These New Times

A new paradigm for a post-imperial world

Ugly euro fallout for banks

Posted by seumasach on November 13, 2010

Alex Brummer

This Is Money

12th November, 2010

The bravado of the British banks takes some beating.

On the plane to China our top bankers, including Peter Sands of Standard Chartered and Sir Philip Hampton ofRoyal Bank of Scotland, grabbed some headlines by moaning to political correspondents – normally off their radar – about onerous taxes and regulation.


There were muffled hints that the bankers might be tempted to move offshore, although where precisely the flower of Scotland RBS (84% controlled by the taxpayer) might be planning to go is a mystery.

What the bankers failed to share with their fellow passengers is the small matter of banking exposures to the PIIGS – Portugal, Ireland, Iceland, Greece and Spain.

The problems of the weak links in euroland, temporarily, were put to rest earlier this year when, after several botched efforts, the European Central Bank became a lender of last resort, offering a safety net for sovereign and commercial debt.

That, along with the joint EU and IMF package for Greece, provided six months of calm.

Now the problem is back with a vengeance as yields on Irish, Portuguese and Spanish debt balloon, raising questions as to where the next domino will fall.

Germany, which after all is euroland’s main paymaster, rubbed some salt into the wounds when it suggested that borrowers using the ECB rescue funds might have to take a ‘haircut’ on the loans. This would require them to recognise that they are worth much less than their nominal value.

The natural reaction in Britain to all this is to breathe a sigh of relief and thank our lucky stars that this is a euroland issue and not for us. How naive we can be.

As yesterday’s 2.7% fall in RBS shares demonstrated, Europe’s problems are our problems. Bank for International Settlements data shows that UK banks have more exposure to our neighbour across the Irish Sea than anyone else at £143bn – with state-controlled RBS and HBOS among the biggest potential losers.

But they are not alone. the BIS data shows that unidentified British banks have some of the biggest exposures to the non-bank private sector in Spain at £86.9bn.

We have become grimly aware of this each quarter as Barclays, among others, has squirrelled away extra provisions against Spanish lending.

In European Union terms Ireland is a minnow that, despite the horrors of its banking system, can be dealt with. It is the contamination that is worrying. If the Irish credit famine were to spread to Spain it would destabilise the whole of euroland and could pose serious problems for our banking system.

Complacency about the state of UK banking is not an option.



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