Malta stands to lose more of its wealth from a Greek default than previously expected, with private investment bank leverage the most likely culprit.
Investment banks take out loans on bonds and then take out loans on those loans
A report published by financial analyst Nomura last week found that Malta had 4.3 per cent of its GDP tied up in Greek assets, more than any other eurozone country and twice as much as previously reported.
That amounts to roughly €250 million, the equivalent of two years of economic growth at current levels.
It is also more than double the two per cent figure the government has said it had committed to beleaguered Greek coffers, prompting questions about the discrepancy in figures.
While Malta’s major high street banks have said they only have minimal sums invested in Greece, the same is not necessarily true of investment banks located here.
One leading economist who requested anonymity said some such banks were extremely leveraged, recycling loans and building up “hidden” balance sheet liabilities.
“Such banks take out loans on bonds and then take out loans on those loans.Their leverage is much higher than immediately apparent because they have multiple exposures hinging on the initial loan,” the economist explained.
Finance Minister Tonio Fenech had previously said the Maltese government has so far issued Greece with loans and guarantees worth €112 million as part of its bailout commitments.
That commitment can grow to a maximum of €700 million should the need arise.
The ministry was asked to explain Nomura’s figures but no reply was forthcoming at the time of writing.
Inconceivable some months ago, a Greek euro exit, or ‘Grexit’, is now considered a distinct possibility within financial and political circles, with ratings agency Standards and Poor’s putting one-in-three odds on a Greek departure.
A complete default would be calamitous for the eurozone, wiping out billions of euros governments and private entities have tied into Greece. That would mean that, while the government would lose the €112 million it has already loaned to Greece, another €140-odd million in third party commitments would also be wiped from the Maltese economy.
But such a worst-case scenario is unlikely to materialise, with an eventual Grexit likely to be a more ordered affair involving a discount, or “haircut” on Greek debt.
A 75 per cent haircut would see Malta €180 million out of pocket, although only €85 million of that would come directly out of government coffers, with the rest borne by the private banks mentioned earlier.
What sort of ripple effect would these losses have across the Maltese economy would depend on the relative impact such losses had on such banks’ balance sheets.
Losing €85 million would still be a significant blow to the economy. The figure is double the precautionary expenditure cuts announced by the government last January, twice the police corps’ annual budget and twice what the government spent on the elderly in 2011.
European leaders now await fresh Greek elections, scheduled for June 17, with baited breath. A renewed victory for leftist parties would make a Greek exit almost inevitable.
But even if Greece were to remain in the eurozone, questions about the single currency’s sustainability remain.
European leaders have hinted at the possibility of tying eurozone countries closer together in a federalised “banking union” with national debts and liabilities pooled and a central European authority assuming sovereignty over many aspects of fiscal policy.
Such a union would have “enormous repercussions” on Malta, the economist noted.
“It would essentially turn the Malta Financial Services Authority into a subsidiary of a central European authority. That could well impinge on the MFSA’s ability to market Malta as a financial services hub,” the economist explained.