This BIS Data Hints at Hidden Costs to PIIG Creditors

This morning the Bank for International Settlements –BIS–┬áreleased new statistics detailing the money trail of out-bound debt flows and inward loan injections to embattled PIIGs (Portugal, Ireland, Italy, and Greece). The EuroZone countries have all chronicled recent financial struggles and are thought to be spiraling towards a future default, prevented only by recent policy interventions from EU leaders that have offered new loans to keep the PIIGs treading water.

Stats from the BIS this morning are useful in helping assess which nations and their financial institutions at the greatest risk of losing their shirts if one of all of the PIIGs has to default. The BIS breaks down exposures for individual countries into two categories “direct” and “indirect.” Nations with direct exposure have creditors who own bonds issued by a PIIG, while nations with indirect exposure have agents that sold default insurance to creditors with direct exposure. Default insurance comes into play here as the stats show that some 30% of PIIG debt assets are subject to default coverage, meaning the insurance companies and agents would have to absorb that portion of the costs in the event of a default.

The combination of exposure risk for each creditor nation is what decides which reform strategies are in the country’s best interest to push on the PIIGs. The U.S. for example, is fairly limited in its direct exposure to PIIG debts, as US creditors hold some $7.3 billion worth of Greek debt (compared to $56 billion held by France and $34 billion by Germany), $5.3 billion of Portuguese assets (total debt of nearly $300 billion), and $51 billion of Irish debt (of $650 billion total). However, Uncle Sam is highly exposed indirectly, liable for default insurance on over 80% of Greek and Portugal’s debt and over 50% of IrIsh debt)

Because the U.S. is limited in direct exposure it would likely support “soft restructuring” plans that allow for partial defaults in the PIIGs as this policy would not trigger a call on default insurance claims. However, the US should stand opposed to allowing a full-on default of PIIGs go through, as it would be liable to pay insurance on a substantial portion of those bad loans. So for the sake of the US economy, let’s keep the PIIGs afloat as long as we can.