TWO MAJOR international financial institutions said Germany aggravated the euro zone crisis with talk about making bond investors pay.
The Bank for International Settlements (BIS) and the head of the European Investment Bank (EIB) both said German chancellor Angela Merkel’s drive to make private bondholders share losses in any future euro sovereign default had intensified the crisis.
“The surge in sovereign credit spreads began on October 18th, when the French and German governments agreed to take steps that would make it possible to impose haircuts on bonds should a government not be able to service its debt,” the Basel-based BIS said in its quarterly review.
EIB president Philippe Maystadt said Dr Merkel was absolutely right to demand a private sector contribution to financial rescues after an emergency safety net expires in 2013, “but the way it was presented created total confusion”.
The BIS said banks reduced their holdings of Greek, Irish, Portuguese and Spanish debt in the second quarter as the sovereign crisis roiled credit markets.
Lenders cut the amount they had at risk to the nations by $107 billion to $2.28 trillion, the Basel, Switzerland-based BIS said in its latest quarterly report.
Virtually all major banking systems reduced their exchange-rate adjusted holdings in Greece during the period, the BIS said. “Concerns about sovereign risk in several euro area economies have resurfaced and become the dominant theme.
“Irish Government bonds came under particularly strong pressure, but Greek, Portuguese, Spanish and later Belgian and Italian government bonds were also affected.
“Sovereign yield spreads between these countries and Germany continued to reflect concerns about their public finances.”
Ireland’s €85 billion bailout from the EU and the International Monetary Fund last month failed to reassure investors about the soundness of the public finances in the region, the BIS said.
French banks had the most at stake in Greece, with $83.1 billion at risk, compared with German bank holdings of $65.4 billion.
British banks had $187.5 billion in loans to Ireland, while German firms had $186.4 billion, the BIS said. – (Bloomberg/Reuters)
