Thursday, 18 November 2010

Avoiding The Irish Haircut

It seems that if you look into any property bubble you'll see the hollow remains of a British bank. Which explains George Osborne's offer of a direct loan from the UK to the Irish government.

It has been made clear by the German government recently that the holders of Irish bonds must take a 'haircut' - a reduction in the value of their bonds - to share the pain in the event that any European money is used to bail out Ireland or its banks.

To the extent that European money involves the European Financial Stability Fund, then the UK would be on the hook for £7bn. Chickenfeed, you say, compared to our own bail-out costs to date, though a sizeable sum in the scheme of recent budget cuts.

But that's not all that's at stake, because the usual suspects filled their boots with about £140bn of Irish assets, according to Channel 4 news tonight, of which RBS and Lloyds share about £80bn. So these positions don't need to take much of a haircut to exceed the UK's £7bn exposure via the ESFS.

Hence George's anxiety to avoid Ireland's trip to the Brussels barber.

What next? British banks were said to be 'tight-lipped' about the exposure to the PIGS. I'd say that's more like "white-knuckled" by now.

Image from Gals Rock.
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