Bank Exposure to PIGS

Many observers believe that Italian and Spanish financial institutions have gone wild and bet their solvency on the greatest event trade in their own country’s national debts. It should come as no shock to anyone that the volume of the Greek bailout money will cash flow immediately to European financial institutions. Credit Suisse table below shows each country’s bank system investment in sovereign debts also by country. Exposure means that Investment to bank capital. CT1 is just a measure of bank system capital.

This reveals just how extremely reliant each country’s national financial banking system is on its own govt for investment. Most significantly, this shows how the two largest euro countries, France and Germany, continue to be extremely exposed to the PIIGS – Portugal, Italy, Ireland, Greece and Spain. Retroactive banker wage cuts may not be the toughest of what is to come as the lenders deleveraging comes back to chew up their capital. It is almost phoenix-like the resurrection of sovereign default possibilities re-emerge, now, on even-more sovereign-indebted (levered) balance sheets.

My opinion is that system is caught in a debt spiral. The missing ingredient is forgiveness.