At first sight, this Credit Suisse chart appears to be comparing apples with oranges, or just pointing out an odd coincidence of numbers (click to enlarge):
(Note that the EFSF couldn’t really spit out the total €440bn if asked despite some suspect advertising — more like €250bn; the Greek bailout isn’t exactly fungible into Portuguese banks either; and we’re just about to get to why Spain is absent.)
But Credit Suisse have really hit the nail on the head here in terms of the direction in which the sovereign debt crisis is travelling and what EFSF activation will really target — basically, hurtling toward the unfinished business left over in European banking. Ireland is a mere prototype of future, bifurcated, sovereign-banking bailouts across the eurozone.
Although — if we’re being postmodern and deconstructionist about this, Credit Suisse have hit the nail on the head in terms of those banking liabilities that they don’t actually and directly contrast with the bailout capacity available.
The illiquidity effects on core banking systems of an unchecked peripheral crisis, for example. Or, more immediately, the reality of Spanish banks and the Spanish sovereign being too big to bail within Europe’s present, divided institutional structure.
Here’s Credit Suisse with some interesting caveats, for instance (emphasis ours):
It can be seen that the available bailout capacity is large enough to completely take on the funding of peripheral European banking systems if need be, as long as there is no requirement for Spain to seek external help…
…the key risk exposure for the European banking sector is not so much sovereign risk (which has always been manageable as a proportion of regulatory capital for banks other than the peripheral ones themselves) as the risk that the Euroland sovereign crisis could escalate into a general liquidity crisis, with adverse effects on the pricing of all kinds of risk assets and on availability of funding for the sector itself. At present, that risk seems manageable, as long as the Spanish government and banking system continues to regain access to private markets.
Credit Suisse have gone into some detail on why Spain does remain a sustainable situation for now. We’re hearing a lot of the Spain caveat around at the moment, however, and it’s increasingly exposed in a market seized with who’s next, which bank is vulnerable, and whose sovereign is about to take them down with it. And note the Spanish financial exposure to the periphery (read, Spain) in this Credit Suisse chart, compared to UK banks for instance:
The Castilian contingency, you could call it.
Sort of makes it sound like a venerable chess opening. Not that this makes us any less nervous about what it really means for Europe.
There is, of course, another way.
Related links:
Spain shakes, rattles and rolls - FT Alphaville
Political reassurances fail to dispel bank fears – FT
Bias in bonds – FT Alphaville
Irish exposure, charted – FT Alphaville