Ireland’s banks are among the most exposed to some of the other weaker euro zone nations, in spite of the industry’s tiny network of foreign operations.
According to analysis of the most recent Bank for International Settlements data on overseas loan exposures, Irish banks together make them the fifth-largest lender in the world to Italy, with total outstanding credit of $40.9 billion.
Irish banks are also among the leading lenders to Portugal, Greece and Spain – ranking fifth, fifth and seventh – even though Ireland’s economy is only the 15th biggest in the European Union.
The data highlight concerns that the interrelationship between the troubled nations of Europe is more deep-seated than many have realized, suggesting that the risk of contagion is high. The figures cover the banks’ exposure to other countries through lending to banks, companies and governments.
The interconnectedness of Ireland’s banking system to other peripheral economies is exacerbated by some foreign banks’ use of Dublin’s financial centre as a low-tax conduit for business.
Depfa, the German bank that is now part of nationalized Hypo Real Estate, accounts for a large chunk of the credit flows between Germany, Ireland, Italy and Spain.
Ireland’s banks were bailed out at the weekend with a €35 billion ($46 billion) package of support, as part of a broader $85billion joint intervention by the European Union and the International Monetary Fund.
Yields on Irish debt and that of other peripheral countries rose after the bail-out, in stark contrast to the aftermath of Greece’s rescue.
Irish 10-year bond yields rose by 15 basis points on Monday and Tuesday, while Spanish gained 33bp and Italian 25bp.
Only on Wednesday, as hopes rose of fresh intervention by the European Central Bank in bond markets, did yields start to fall with Ireland dropping 41bp, Spain 21bp and Italy 15bp.
However, markets remain nervous that other euro zone countries are fundamentally troubled and are not convinced that the terms of the Irish bail-out do anything to address the broader concerns about the euro zone.
“We do not think this will bring an end to concerns around the peripheral economies,” analysts at Barclays wrote. “And we think especially Portuguese and Spanish sovereign and corporate debt will continue to be watched carefully by the market.”
Japanese banks are the sixth biggest lenders to both Ireland and Italy, while US banks are highly exposed to Ireland and Spain, according to the BIS data.