Central Bank’s €280 million in reserves able to withstand Greek haircut

Central Bank governor Josef Bonnici has sought to reassure observers that Malta's national reserves are well suited to withstand a haircut on Greek bonds, discounting claims in a Reuters report that the bank would need recapitalisation.

Reports by Reuters suggested that Malta could be forced to take significant losses on bond holdings with Greece, as European policymakers were reported to be working on "last chance" options to bring Greece's debts down and keep it in the eurozone.

Policymakers who spoke to the news agency said the latest aim is to reduce Greece's debts by a further €70-100 billion, so that Greek debt can come down to a manageable 100% of its gross domestic product. Two officials indicated that the French, Maltese and Cypriot central banks were most exposed to Greek government debt and would probably need a capital injection. Two other officials said the ECB could also need balance sheet support.

Bonnici however said Malta's reserves were well capitalised. "The Central Bank of Malta has a high level of reserves and capital of approximately €280 million while its holdings of Greek government bonds is minimal and mostly already discounted with the appropriate haircuts," Bonnici said.

"Any talk of recapitalisation is really not relevant.
It should also be noted that the Eurosystem Central Banks are bound by the prohibition of monetary financing which means that the debt of any member state cannot be monetised."

Finance Minister Tonio Fenech lambasted the Reuters report that claimed Malta's central bank would have to be recapitalised in the case of a haircut.

"It is completely wrong and highly speculative. The Maltese government does not anticipate such a situation to happen, but even if things had to come to their worst, the CB's exposure to Greek bonds is minimal and the losses could be easily absorbed by the Central Bank's profits of just one financial year."

Fenech underlined the fact that Malta's exposure to Greek debt, in terms of government-owned bonds, is quite low and minimal. Bonds are one aspect of the Greek debt, while guarantees pledged by EU member states are another.

In terms of its exposure to GDP, Malta is the EU's most exposed of member states to a possible Greek exit from the eurozone. Malta granted €56 million in bilateral loans to Greece and another €56 million was guaranteed in a second bailout through the European Financial Stability Facility. Japanese investment bank Nomura tagged Malta's total exposure as a percentage of its GDP at 4.3%, the highest of all EU states, followed by Estonia (4.2%), Slovenia (3.9%), and Slovakia (3.7%). The EU state with the lowest exposure is Luxembourg at 1.8% of its gross domestic product.

ECB officials believe cutting Greek debt by 120% of GDP by 2020 is not possible. One of the options is to write down the value of its government bonds held by central banks by 30% - a haircut, as it is termed.

The 30% haircut would amount to €70 billion.