EU banks could absorb Irish debt - report

EU BANKS would be able to absorb exceptional losses stemming from their exposure to Irish debt without needing extra capital, even under a “severe” scenario, rating agency Moody’s said yesterday.

It assessed debt exposures of more than 30 banks from 10 countries and found that their exposure to debt in Ireland, Spain, Portugal and Greece is “manageable” relative to their capital levels. “Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases, even under worse-than-expected conditions,” said Jean-François Tremblay, one of the report’s authors.

A country-by-country breakdown shows the surveyed banks are more exposed to private-sector debt in the Republic than sovereign or interbank debt. Some 70 per cent of the banks’ Irish exposure relates to the private sector. This compares to 43 per cent in Greece, 39 per cent in Portugal and 52 per cent in Spain. Private-sector debt would typically include loans such as mortgages and advances to business.

Moody’s based its study on returns from more than 30 banks in 10 countries, most of which have a regulatory capital level of close to 10 per cent.

The bulk of the exposure to the so-called PIGS (Portugal, Ireland Greece and Spain) countries was to Spain, which accounted for 67 per cent of the total. Ireland accounted for just 12 per cent of the total, compared to 14 per cent for Portugal. Greece accounted for the lowest proportion of the banks’ exposure, with 7 per cent.

The Moody’s stress test involved simulating a forced sale of public sector bonds at 20 per cent below the steepest fall in market valuations over recent months.