French and German banks have almost $1 trillion exposure to Southern European economies according to a Bank of International Settlements (BIS) report released last Monday (Download BIS report).
“Exposures” include loans, loan commitments, and derivatives contracts, and represent the cost to the banks if there were a default.
All in all, Europe's banks have almost $1.6 trillion exposure to the four countries most susceptible to default in the Eurozone: Portugal, Ireland, Greece and Spain. $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal, and $206 billion to Greece.
This builds on the chart I posted at the end of last month, but provides a more in depth view of the goings on.
This is why the EU changed the rules last week for the way it looks at breaches of their rules on debt and deficits, by introducing a “dynamic debt” policy. This policy is based upon debt being allowable above the previous limits, as long as that debt is going down.
So that’s alright then.
Except that the level of debt is meant to be under 60% of GDP and yet, according to the latest economic forecasts by the European Commission, the average level of debt is going to reach 88.5% of overall Eurozone GDP in 2011 and 83.8% for the EU as a whole,
Eurostat figures published in April (12-page PDF) reveal that the highest debt-to-GDP ratios are 115.8% in Italy, 115.1% in Greece, 96.7% in Belgium, 78.3% in Hungary, 77.6% in France, 76.8% in Portugal and 73.2% in Germany. Malta (69.1%), the UK (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%) came next.
Mind you, this measures only public debt to GDP ratios, e.g. the government’s exposures, and many EU countries are arguing it should cover aggregate debt which would include the private sector borrowing levels. If this were taken into account, then the UK would lead the pack of debtors.
Expect this all to be reviewed and redeveloped under new EU rules announced on 30th June.