The EU loans crisis began 6 months ago, when it became likely that Greece was never going to be able to repay its debts in full. Since then, Ireland has moved into a similar position. And there are expectations that Portugal and Spain will follow during 2011.
Unsurprisingly, however, given the general lack of transparency in the banking sector, it has been difficult to discover who is owed what, in terms of national banking loans. The central bankers’ bank, the Bank for International Settlements (BIS), produced a seemingly definitive listing at the time. But now they have revised it, upwards, quite sharply.
The chart above shows their new summary. The vertical axis shows the debt held by each country, so France has lent $49bn to Portugal, and $77bn to Ireland. And collectively, it shows that the world’s banks are owed $2.282 trn by the 4 EU countries currently most at risk of default.
Germany and France are most at risk from any default, accounting for $913bn of the loans. But the UK and USA, with $370bn and $353bn, are clearly also on the hook if something does go wrong. This ‘wake-up call’ no doubt explains last week’s recent volte face in France, where serious discussion is now underway about moving to fiscal union, to support EU monetary union.
This, of course, was part of the original German proposals when the euro was first discussed. But it was vetoed by France, concerned as always about national sovereignty. However, events this year have confirmed that one can’t have one without the other.
The challenge for 2011 will be whether the EU has the political will to move forward in this area. Failure to do so, will make life difficult indeed within the euro area, and for those who have lent to it.